Agency Model and Wholesale Pricing: Apple versus Amazon in the E-Book Market

Abstract

Apple's choice of the agency model (i.e., Apple demands a share from the retail price set by the publishers) when entering the e-book market was surprising because: (i) the upstream firms can accrue all rents in a simultaneous move game if it determines the retail price; and (ii) the incumbent, Amazon, used wholesale pricing arrangements. This paper compares the two different contract types, pure and mixed: one retailer opts for wholesale, the other for the agency model. Departing from a standard and symmetric oligopolistic setup of Bertrand competing retailers and producers, the model accounts for retailers having (a) a significant contribution to the final value and (b) a strategic first-mover advantage. Both conditions combined are necessary (but not sufficient) in order to explain Apple's choice and the possibility of an asymmetric equilibrium.

Manufacturer selling mode choice for new‐version product introduction

“…Dong et al (2018) investigated the impact of asymmetric information on firm's channel strategy, while Yi et al (2018) studied how customer fairness affect manufacturer's choice between direct model and agent model. Tan and Carrillo (2017), Kim (2018), Wirl (2018), and Zhu and Yao (2018) discussed the digital content provider's selling mode choice (agency or wholesale) of digital contents (e.g., e‐book). Wang et al (2018), Shen et al (2019), and Pu et al (2020) are also valuable references on a manufacturer's selling mode choice among direct sale, reselling, or agent selling.…”

Interaction between the introduction strategy of the third‐party online channel and the choice of online sales format

“…Our work belongs to the rich stream of literature on online sales formats. Taking the e‐book industry as the background, some scholars investigate under what conditions e‐books should be distributed by the agency selling format (e.g., Tan et al., 2015; Tan and Carrillo, 2017; Wirl, 2018). And in the hotel industry, some scholars study the different factors on the online sales format between the hotel and online travel agency, for example, hotels’ capacity (Liao et al., 2019), hotels’ competition (Ye et al., 2020), hotels’ bargaining power (Ye et al., 2019), and value‐added service and demand uncertainty (Zhang et al., 2021b).…”

New brand introduction and selling mode choice for online retailers with network effect

“…Tian et al (2018) illustrate that when the competition between upstream suppliers is weak and the order‐fulfillment cost is low, the intermediary prefers agency selling mode. There are other discussions relevant to online retailers' strategic choices of selling modes recently (Chen et al, 2018; Foros et al, 2017; Hagiu & Wright, 2015; Kim, 2018; Li & Ai, 2019; Tan & Carrillo, 2017; Wirl, 2018; Zhang & Zhang, 2020). In contrast, our paper examines an online retailer's strategic choices of both the new brand introduction and related selling modes and analyzes how the brand competition impacts these choices.…”