Supply Chain Management for Digital Content Platforms
Information goods—such as books, music, and video—have long been sold via a traditional retail model involving physical media (e.g., physical books, CDs, and DVDs) sold "a la carte'' via third party retailers. In recent years, however, innovations in digital distribution technology have enabled new ways of selling, distributing, and consuming information goods. For example, books can now be sold as e-books, and may be consumed via traditional a la carte methods (e.g., when a consumer buys a permanent license to an e-book) or via subscription services (e.g., when a consumer pays a monthly fee for unlimited access to a library of content without ever owning a permanent copy of any books in that library). The rapid growth and change of digital distribution technology has, however, introduced a number of challenges to the management of supply chains for information goods. We examine three problems in this area. First, we analyze a supply chain where a manufacturer produces both physical and digital goods and has a choice between selling through a single retailer who sells both formats or two format-specific retailers. We find that when the manufacturer sells through the single retailer, the supply chain achieves the centralized system outcome by selling zero physical goods and the centralized optimal quantity of the digital good. However, despite this, a manufacturer would prefer to sell through two format-specific retailers rather than through a single retailer, with a strictly positive quantity of the operationally inferior physical good, to the detriment of total supply chain efficiency. Additionally we find that consumers and society are both better off when the manufacturer sells through independent retailers. Next, we analyze selling decisions for supply chain of a digital content platform and the two creators (low and high quality) who sell their content through the platform. The creators have a choice of selling their content a la carte and/or via subscription and being paid via revenue sharing contracts. We find that the platform cannot induce only the high quality consumer to sell via subscription which means that the subscription offerings are always weakly lower in quality than a la carte offerings. We also find that in many cases, to maximize profit, the platform should either induce only the low quality creator to sell via subscription, or it should shut down a la carte sales altogether; inducing high quality on the subscription service is excessively costly. This effect can be mitigated—and inducing high quality on the subscription service can be optimal for the platform—in the presence of a large “subscription only” consumer segment. In the third paper, we explore the optimal design of revenue splitting rules that feasible (i.e. induces all creators to join the subscription service), fair (i.e. allocates revenue only based on amount of consumption generated by each creator) and optimal (i.e. both fair and feasible at the lowest cost possible to the platform) and allows a platform to maximize its own revenue while inducing a wide variety of high quality content on the service. We show that a splitting rule that is quadratic in the consumption of each creator's product is optimal while a linear rule is not and that a linear rule can actually perform arbitrarily bad under some circumstances.
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