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Strategic Analysis of Agency Contracts for Pricing of Digital Goods
The advent of digital goods has made a significant impact on the current traditional (physical) goods markets for items such as movies, music, video games, and books. Firms that manage both traditional and digital goods distribution channels are facing many emerging operational challenges. One of the most pivotal problems for these media related industries concerns the supply chain contract model utilized for the distribution of digital goods alongside their traditional counterparts. Recently, the agency model exploited by publishers in the e-book industry has been highlighted in the press as a result of the U.S. Department of Justice's (DOJ) lawsuit against Apple, Inc. Chief amongst the DOJ...
The Agency Model for Digital Goods
While digital goods industries such as entertainment, software, and publishing are growing at a rapid pace, traditional supply chain contract models have failed to evolve with the new digital economy. To illustrate, the agency model utilized by the e-book publishing industry has recently received much negative attention brought by the U.S. Department of Justice's lawsuit against Apple, Inc. The emerging agency model in the e-book industry works as follows: the publisher sets the price of the digital goods and the retailers who serve as agents retain a percentage of the revenue associated with the consumer purchase. The regulators claim that the agency model is hurting this industry as well a...
Altruism Or Shrewd Business? Implications of Technology Openness on Platform Innovations and Competition
In today's highly competitive business environment, a growing number of platforms are opening their technologies. This leads us to wonder whether sharing one's proprietary technology is altruism or a shrewd business move. In this paper, we study the incentive of why firms share their proprietary technology with their competitors. In contrast to previous literature focusing on network effects, our study reveals a novel explanation for why firms are willing to open their technologies. We focus on two effects driven by the decision of technology openness. On the one hand, a commitment to share technology leads to information disclosure (information effect). The competitor will learn the other f...
Agency Models in Online Platforms
With the rise of the platform economy over the past decade, numerous online retailers have switched from the traditional wholesale model to the agency model. In the agency model, the suppliers, rather than the retailers, control the pricing decisions, and they share a proportion of the revenue with the retailers in return for using the online marketplace to reach consumers. It has been reported that third-party sellers generate most of Amazon's revenue through the agency model. The agency model has become a dominant distribution contract for many physical products in the online space. It also penetrates digital content distribution, as evidenced by its adoption by Apple and Google in both of...
Social Pricing in a Distribution Channel Under Conspicuous Consumption
The proliferation of social networking platforms such as Facebook, Twitter, and Instagram has greatly facilitated social interactions among individuals, and thus their product consumption becomes more visible to their peers. This enhanced visibility influences consumers' purchase decisions of conspicuous goods, because it affects social value derived in their conspicuous consumption. In this study, we develop an analytical model to study the impact of such social technologies on social pricing along a distribution channel. Consumers have conspicuous consumption preferences, and are grouped by snobs and conformists. Snobs value the product exclusivity while conformists prefer the product popu...
Trading Virtual Goods? Implications on Virtual Goods Developer and Consumer
First-sale doctrine has been recognized by the United States Supreme Court since 1908. This doctrine protects consumers' rights to resell purchased products. In recent years, consumers have begun to purchase an increasing amount of virtual goods, which renders the first-sale doctrine unclear. There are two main challenges leading to the uncertainty of the first-sale doctrine in the digital age: lack of proper technology, and economic implications for developers and consumers. The advent of the block-chain solves the technology challenge, as it can track provenance and establish chain of custody. In this study, we construct an analytical model to investigate the economic impact of trading pre...
Less is More? The Strategic Role of Retailer Capacity
Retailers are often short on capacity, so a logical assumption would be that retailers could improve their profits by acquiring more. In this study, we show that this is not necessarily true, because retailer's capacity has a strategic role in channel distribution. Specifically, we consider a setting with multiple suppliers and a common retailer. Our analysis reveals that, first, when the retailer's capacity is limited, its suppliers will compete head-to-head for the retailer's capacity, thereby driving down the equilibrium wholesale prices. Second, when the number of suppliers is large, the retailer finds it optimal to limit its own capacity to induce fierce competition among the suppliers....
Benefits of Sourcing Alternative Inputs of Manufacturers for Suppliers
A downstream manufacturer can purchase high-quality inputs from its upstream raw-material supplier to produce high-quality products. The manufacturer may also have the option to source alternative cheaper low-quality inputs to partially replace the inputs from the original supplier to produce products with lower quality. Intuitively, this option could hurt the supplier in two ways: It sells fewer inputs, and it needs to set a lower wholesale price due to the competitive pressure. Interestingly, our study reveals an opposing finding: When the downstream manufacturer has the option of sourcing alternative inputs, the upstream supplier can benefit not only by selling more inputs but also by setting a higher wholesale price. Additionally, despite this higher wholesale price, it turns out that product price falls and the manufacturer can still earn more profits. Moreover, this paper shows that the wholesale price of the supplier's inputs can be higher than the price of the manufacturer's products. Finally, we also demonstrate the robustness of our findings under several alternative model settings.
Mitigating Inventory Overstocking
Service level agreements (SLAs) are widely adopted forms of performance-based contracts in operations management practice, and fill rate is the most common performance metric among all the measurements in SLAs. Traditional procedures characterizing the order-up-to level satisfying a specified fill rate implicitly assume an infinite performance review horizon. However, in practice, inventory managers are liable to maintain and report fill rates over a finite performance review horizon. This horizon discrepancy leads to the deviation between the target fill rate and actual achieved fill rate. In this study, we first examine the behavior of the fill rate distribution over a finite horizon with ...
Handbook of Newsvendor Problems
As a fundamental problem in stochastic inventory control, the newsvendor problem has been studied since the 18th century in the economic literature, and has been widely used to analyze supply chains in fashion and seasonal product industries. Since the 1950s, the newsvendor problem has been extensively studied in operations research and extended to model a variety of real-life problems. The simplest and most elementary version of the newsvendor problem is an optimal stocking problem in which a newsvendor needs to decide how many newspapers to order for future demand, where the future demand is uncertain and follows a stationary distribution. Research in this area has greatly increased over t...
