Dynamic Demand and Pricing Strategy in the E-Book Market
intertemporal price discrimination
Markov-perfect equilibrium with forward-looking consumers
Advertising and Promotion Management
E-reading has experienced rapid growth in the past few years and has raised new questions. On the supply side, retailers such as Amazon jointly sell e-readers and e-books. It remains unclear how they can coordinate the two products to conduct intertemporal price discrimination (IPD). On the demand side, it remains unclear how much of e-book sales come from cannibalizing print books and how much serve as market expansion to the book business. I empirically address these questions using individual-level data from 2008 to 2012. I estimate a dynamic structural model of consumer e-reader adoption and subsequent book purchases, including quantity, reading format (e-book or print book), and retailer choices (Amazon, other online retailers, or offline bookstores) in a number of book genres. The estimation reveals two consumer types, avid readers and general readers, who self-select into buying e-readers based on their unobserved heterogeneous book tastes. Compared with general readers, avid readers buy more books, adopt e-readers earlier, and have larger cannibalization rates. The two types also have different relative demand elasticities between e-readers and e-books. Given the estimated demand system, I simulate the optimal dynamic pricing strategies of e-readers and e-books for the monopolist retailer Amazon who faces forward-looking consumers. I find that Amazon should harvest on e-readers and invest in e-books. Complementarity provides the firm a novel dimension of consumer heterogeneity (the relative demand elasticities between e-readers and e-books) to exploit. The joint IPD strategy provides a better screening device for more profitable consumers and limits consumer's ability to intertemporally arbitrage. To evaluate the impact of e-books on print book sales, I simulate the world without e-books and compare it with the observed one. I find that 42% of e-book sales come from cannibalizing print book sales and that 58% come from market expansion. Of the cannibalization effect, offline bookstores bear 53% of the cannibalization loss, while Amazon bears 32% and other online retailers bear 15%. I further explore how the impact of e-books would change under alternative pricing arrangements. Overall, the results have managerial implications to publishers, book retailers, and policymakers in the e-book market.