The technological developments observed in the last two decades contributed to the digitalization of products and the introduction of devices to consume this digital content. Many online retailers launched their own devices, which had an effect on the pricing strategies of the various channel members. In many industries, these developments resulted in the traditional wholesale pricing arrangement being replaced by Revenue-Sharing Contracts (RSC). The paper investigates a manufacturer-retailer framework where the manufacturer sells a base product in two different formats: a tangible product sold directly to consumers and a digital format sold via the retailer. The latter also sells an optional contingent product (device). We find that 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. Furthermore we obtain that under wholesale pricing the profitability of the digital product is hurt by a double marginalization effect. The resulting too low digital product quantity also has a detrimental effect on the contingent product profit. For this reason the retailer prefers RSC almost always. The manufacturer is interested by its implementation only if it receives a sufficiently large part of the digital product revenue.
Published May 2016 , 25 pages