Strategic analysis of e-book pricing models in the presence of network externalities

In the presence of network externalities, we consider a supply chain which consists of a publisher and a retailer, both e-books and physical books are simultaneously sold to consumers. We analyse pricing strategies of the publisher and the retailer under two different models which are widely used in the real market: the agency model and the wholesale model. We find both retail prices of e-books and physical books in the agency model are lower than that in the wholesale model. However, we show that both sides have opposite preferences for pricing model when the substitute level between e-books and physical books is moderate. Our results may explain why retail price of books in China is much lower than in developed countries to some extent. Our results suggest that the retailer should strive to provide more different qualities of e-readers to the consumers and negotiate with the publisher for more e-book titles available on his/her e-reader.