Thursday, March 7, 2013

Digital, Physical, or Both: The Case of Twilight

Today, Ryan Dorow wrote an interesting post on the pricing of digital versus physical products in which he cites another UChicago graduate student Mickey Ferri for his work.  Here's a key excerpt:
Pricing gets even trickier when there are digital and physical versions of the "same" product (I will use "same" here to denote same underlying intellectual property that is the basis for the product). For example, you can buy a CD or an mp3 or iTunes format of the same album. Video games can be downloaded or purchased on a disk or cartridge. You can buy books or eBooks. Here's the tricky part: Being exposed to one version of the product may make consumers more likely to purchase the other version. For example, downloading a song may expose you to new music and may make you more likely to purchase a physical album. This would lead to prices on digital products that are below the price a company would set in the case where there is no relation between the products. Maybe it should even be free -- or maybe the company should pay consumers to take the digital copy! On the other hand, having one version may make you less likely to purchase the other. For example, if you have a digital copy of a song, you may decide you don't need the physical copy. In this case, assuming it has control over the distribution of the digital copy, the company may have to optimally price the digital version higher than it otherwise would in order to prevent cannibalization of its physical products. So it's not clear how a company should set its prices without understanding the market and how consumers use the products.
I found this to be particularly relevant today because I have had some interesting recent experience with the dual-versioning of a product.  My wife and I recently purchased Twilight: Breaking Dawn Part II on Blu-Ray from Amazon.  Not only did the purchase come with a digital copy (something the studio does with most Blu-Ray products, I think), but because we made the purchase on Amazon, our purchase came with a free rental of Twilight: Breaking Dawn Part II through Amazon Prime's streaming service.  As a result, we were able to watch the movie immediately after purchase.  I'm not sure exactly how this fits into Mickey's research design, but I found it to be an interesting example of pricing and bundling.

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