Pricing decisions in marketing channels in the presence of optional contingent products

Abstract

The technological developments observed in the last two decades contributed to the digitalization of products and the introduction of various mobile devices designed for the consumption of this digital content. Many online retailers launched their own mobile devices, which had a direct effect on their multi-product pricing strategies, but also an effect on the other channel members' pricing decisions (i.e., digital-content providers). In many industries, these developments resulted in switching from traditional wholesale pricing to Revenue-Sharing Contracts (RSC), involving a shift of control over retail prices in the channel, a situation that was not always easily accepted by channel members. We examine a manufacturer-retailer framework where the manufacturer sells a base product in two formats: a tangible product sold directly to consumers and a digital format sold via an online retailer. The latter also sells an optional contingent product, a device used to consume the digital product. We investigate two questions: The first one pertains to the contingent product's impact on firms' pricing strategies. The second question investigates whether the manufacturer is interested in the implementation of an RSC and then looks at whether this pricing model suits the retailer and consumers. Our main results are as follows: (1) The presence of the contingent product leads to a higher retail price for the digital base product and negatively affects the demand for the tangible product format. is interested in an RSC only if it receives a sufficiently large part of the digital-product revenue, but the retailer is almost always interested by this pricing model. (3) The double marginalization effect could benefit the manufacturer.

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