[SEM Seminar] Digital goods reselling: implications on cannibalization and price discrimination

Topic: Digital goods reselling: implications on cannibalization and price discrimination

Speaker: Assistant Professor Li Yang, Ivey Business School, Western University (UWO)

Date and time: April 24, 10:00–11:30

Venue: Room 411, SEM

Host: Liu Baolong

Abstract:

Resale  of used physical goods provides close substitutes for new goods and  thus would cannibalize sellers’ profits in the primary market. In  digital goods markets, cannibalization might be exacerbated because used  digital goods can be perfect substitutes for new ones. In this paper,  we argue that, rather than a threat, product resale can be an effective  pricing tool for managing heterogeneous demand. We consider a digital  goods/service seller who offers a contract to a group of heterogeneous  customers at a fixed price for a specific amount of usage allowance.  Instead of implementing restrictive barriers to sharing, the seller  allows the subscribers to share their allowances with others. We find  that the seller’s optimal strategy is to facilitate reselling by  imposing zero transaction costs. The sharing contract achieves the same  outcome as a two-part tariff, in which subscribers pay an entry fee and a  marginal rate of usage. Not only do they yield identical revenue, but  they also achieve the same market coverage and result in the same demand  and individual surplus for customers of the same type. Therefore, the  sharing contract is effectively a vehicle of price discrimination. This  finding challenges a conventional belief that the success of price  discrimination has to rely on the prevention of reselling.

Biography: