IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v60y2014i6p1413-1433.html
   My bibliography  Save this article

An Empirical Analysis of Digital Music Bundling Strategies

Author

Listed:
  • Brett Danaher

    (Department of Economics, Wellesley College, Wellesley, Massachusetts 02482)

  • Yan Huang

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Michael D. Smith

    (School of Information Systems and Management, Heinz College, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Rahul Telang

    (School of Information Systems and Management, Heinz College, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

We use panel data on digital song and album sales coupled with a quasi-random price experiment to determine own- and cross-price elasticities for songs and albums. We then develop a structural model of consumer demand to estimate welfare under various policy relevant counterfactual scenarios. This approach represents an early application of the “big data” management paradigm within the media industries and provides managers with detailed guidance on optimal pricing and marketing strategies for digital music. Our results show that tiered pricing coupled with reduced album pricing increases revenue to the labels by 18% relative to uniform pricing policies traditionally preferred by digital marketplaces while also increasing consumer surplus by 23%. Thus, optimal tiered pricing can yield a Pareto improvement over the prior status quo. Additionally, our results indicate that even without tiered pricing, unbundling albums outperforms “album-only” pricing policies that dominated the era of physical CD/cassette sales. This paper was accepted by Alok Gupta, special issue on business analytics .

Suggested Citation

  • Brett Danaher & Yan Huang & Michael D. Smith & Rahul Telang, 2014. "An Empirical Analysis of Digital Music Bundling Strategies," Management Science, INFORMS, vol. 60(6), pages 1413-1433, June.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:6:p:1413-1433
    DOI: 10.1287/mnsc.2014.1958
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2014.1958
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.2014.1958?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
    2. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    3. Ben Shiller & Joel Waldfogel, 2009. "Music for a Song: An Empirical Look at Uniform Song Pricing and its Alternatives," NBER Working Papers 15390, National Bureau of Economic Research, Inc.
    4. Waldfogel, Joel, 2009. "Lost on the web: Does web distribution stimulate or depress television viewing?," Information Economics and Policy, Elsevier, vol. 21(2), pages 158-168, June.
    5. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    6. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    8. Brett Danaher & Samita Dhanasobhon & Michael D. Smith & Rahul Telang, 2010. "Converting Pirates Without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy," Marketing Science, INFORMS, vol. 29(6), pages 1138-1151, 11-12.
    9. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    10. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    11. Chuang, John Chung-I & Sirbu, Marvin A., 1999. "Optimal bundling strategy for digital information goods: network delivery of articles and subscriptions," Information Economics and Policy, Elsevier, vol. 11(2), pages 147-176, July.
    12. Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics (QME), Springer, vol. 8(1), pages 1-33, March.
    13. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, The RAND Corporation, vol. 37(4), pages 964-982, December.
    14. Il-Horn Hann & Christian Terwiesch, 2003. "Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel," Management Science, INFORMS, vol. 49(11), pages 1563-1579, November.
    15. Lorin M. Hitt & Pei-yu Chen, 2005. "Bundling with Customer Self-Selection: A Simple Approach to Bundling Low-Marginal-Cost Goods," Management Science, INFORMS, vol. 51(10), pages 1481-1493, October.
    16. Xianjun Geng & Maxwell B. Stinchcombe & Andrew B. Whinston, 2005. "Bundling Information Goods of Decreasing Value," Management Science, INFORMS, vol. 51(4), pages 662-667, April.
    17. Timothy Derdenger & Vineet Kumar, 2013. "The Dynamic Effects of Bundling as a Product Strategy," Marketing Science, INFORMS, vol. 32(6), pages 827-859, November.
    18. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
    19. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    20. Pradeep K. Chintagunta, 2001. "Endogeneity and Heterogeneity in a Probit Demand Model: Estimation Using Aggregate Data," Marketing Science, INFORMS, vol. 20(4), pages 442-456, December.
    21. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    22. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics (QME), Springer, vol. 6(1), pages 41-78, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Manqi (Maggie) Li & Yan Huang & Amitabh Sinha, 2020. "Data-Driven Promotion Planning for Paid Mobile Applications," Information Systems Research, INFORMS, vol. 31(3), pages 1007-1029, September.
    2. Saeed Alaei & Ali Makhdoumi & Azarakhsh Malekian & Saša Pekeč, 2022. "Revenue-Sharing Allocation Strategies for Two-Sided Media Platforms: Pro-Rata vs. User-Centric," Management Science, INFORMS, vol. 68(12), pages 8699-8721, December.
    3. Marc Ivaldi & Ambre Nicolle & Frank Verboven & Jiekai Zhang, 2024. "Displacement and complementarity in the recorded music industry: evidence from France," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 48(1), pages 43-94, March.
    4. Peukert, Christian & Kretschmer, Tobias, 2014. "Video Killed the Radio Star? Online Music Videos and Digital Music Sales," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100530, Verein für Socialpolitik / German Economic Association.
    5. Karla Borja & Suzanne Dieringer, 2022. "Is music piracy over? Comparing music piracy attitudes and behaviors between young generations," Journal of Consumer Affairs, Wiley Blackwell, vol. 56(2), pages 899-924, June.
    6. Wlömert, Nils & Papies, Dominik, 2019. "International heterogeneity in the associations of new business models and broadband Internet with music revenue and piracy," International Journal of Research in Marketing, Elsevier, vol. 36(3), pages 400-419.
    7. Erdem Dogukan Yilmaz & Ivana Naumovska & Milan Miric, 2023. "Does imitation increase or decrease demand for an original product? Understanding the opposing effects of discovery and substitution," Strategic Management Journal, Wiley Blackwell, vol. 44(3), pages 639-671, March.
    8. Matteo Filippi & Mastrobuoni Giovanni & Mollisi Vincenzo, 2024. "Quasi-Experimental Demand Estimation of Memberships and of Their Usage," Working papers 090, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    9. Jeremy Watson & Megan MacGarvie & John McKeon, 2023. "It Was 50 Years Ago Today: Recording Copyright Term and the Supply of Music," Management Science, INFORMS, vol. 69(1), pages 351-376, January.
    10. Stephany, Fabian, 2021. "When Does it Pay Off to Learn a New Skill? Revealing the Complementary Benefit of Cross-Skilling," SocArXiv sv9de, Center for Open Science.
    11. Shengli Li & Qiuyue Luo & Liangfei Qiu & Subhajyoti Bandyopadhyay, 2020. "Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 688-704, March.
    12. Raoul Kübler & Rouven Seifert & Michael Kandziora, 2021. "Content valuation strategies for digital subscription platforms," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 45(2), pages 295-326, June.
    13. Yan Huang & Stefanus Jasin & Puneet Manchanda, 2019. "“Level Up”: Leveraging Skill and Engagement to Maximize Player Game-Play in Online Video Games," Information Systems Research, INFORMS, vol. 30(3), pages 927-947, September.
    14. Zhuoxin Li & Ashish Agarwal, 2017. "Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram," Management Science, INFORMS, vol. 63(10), pages 3438-3458, October.
    15. Fabian Stephany, 2020. "When Does it Pay Off to Learn a New Skill? Revealing the Complementary Benefit of Cross-Skilling," Papers 2010.11841, arXiv.org, revised Feb 2021.
    16. Vithala R. Rao & Gary J. Russell & Hemant Bhargava & Alan Cooke & Tim Derdenger & Hwang Kim & Nanda Kumar & Irwin Levin & Yu Ma & Nitin Mehta & John Pracejus & R. Venkatesh, 2018. "Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 107-120, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    2. Joao Macieira & Pedro Pereira & Joao Vareda, 2013. "Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play," Working Papers 13-15, NET Institute.
    3. Tomohiro Ando, 2018. "Merchant selection and pricing strategy for a platform firm in the online group buying market," Annals of Operations Research, Springer, vol. 263(1), pages 209-230, April.
    4. Iaria, Alessandro & ,, 2020. "Identification and Estimation of Demand for Bundles," CEPR Discussion Papers 14363, C.E.P.R. Discussion Papers.
    5. Gregory Crawford, 2008. "The discriminatory incentives to bundle in the cable television industry," Quantitative Marketing and Economics (QME), Springer, vol. 6(1), pages 41-78, March.
    6. Pereira, Pedro & Ribeiro, Tiago & Vareda, João, 2013. "Delineating markets for bundles with consumer level data: The case of triple-play," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 760-773.
    7. Ashutosh Prasad & R. Venkatesh & Vijay Mahajan, 2017. "Temporal product bundling with myopic and strategic consumers: Manifestations and relative effectiveness," Quantitative Marketing and Economics (QME), Springer, vol. 15(4), pages 341-368, December.
    8. Jiang, Renna & Manchanda, Puneet & Rossi, Peter E., 2009. "Bayesian analysis of random coefficient logit models using aggregate data," Journal of Econometrics, Elsevier, vol. 149(2), pages 136-148, April.
    9. Wang, Ao, 2021. "A BLP Demand Model of Product-Level Market Shares with Complementarity," The Warwick Economics Research Paper Series (TWERPS) 1351, University of Warwick, Department of Economics.
    10. Shin-yi Wu & Lorin M. Hitt & Pei-yu Chen & G. Anandalingam, 2008. "Customized Bundle Pricing for Information Goods: A Nonlinear Mixed-Integer Programming Approach," Management Science, INFORMS, vol. 54(3), pages 608-622, March.
    11. Charles Romeo, 2007. "A Gibbs sampler for mixed logit analysis of differentiated product markets using aggregate data," Computational Economics, Springer;Society for Computational Economics, vol. 29(1), pages 33-68, February.
    12. Vithala R. Rao & Gary J. Russell & Hemant Bhargava & Alan Cooke & Tim Derdenger & Hwang Kim & Nanda Kumar & Irwin Levin & Yu Ma & Nitin Mehta & John Pracejus & R. Venkatesh, 2018. "Emerging Trends in Product Bundling: Investigating Consumer Choice and Firm Behavior," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 107-120, March.
    13. Li, Minqiang & Feng, Haiyang & Chen, Fuzan & Kou, Jisong, 2013. "Numerical investigation on mixed bundling and pricing of information products," International Journal of Production Economics, Elsevier, vol. 144(2), pages 560-571.
    14. Hemant K. Bhargava, 2013. "Mixed Bundling of Two Independently Valued Goods," Management Science, INFORMS, vol. 59(9), pages 2170-2185, September.
    15. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    16. Neil Gandal & Sarit Markovich & Michael H. Riordan, 2018. "Ain't it “suite”? Bundling in the PC office software market," Strategic Management Journal, Wiley Blackwell, vol. 39(8), pages 2120-2151, August.
    17. Kaiser, Ulrich, 2001. "The effects of website provision on the demand for German women's magazines," ZEW Discussion Papers 01-69, ZEW - Leibniz Centre for European Economic Research.
    18. Pereira, Pedro & Ribeiro, Tiago, 2011. "The impact on broadband access to the Internet of the dual ownership of telephone and cable networks," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 283-293, March.
    19. Stefano Galavotti, 2014. "Reducing Inefficiency in Public Good Provision Through Linking," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(3), pages 427-466, June.
    20. Peter Davis & Pasquale Schiraldi, 2014. "The flexible coefficient multinomial logit (FC-MNL) model of demand for differentiated products," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 32-63, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:60:y:2014:i:6:p:1413-1433. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.