The Impact of Digitization on Information Goods Pricing Strategy

The widespread adoption of the Internet and digital technologies has transformed the distribution and consumption of information goods. We develop a parsimonious model to study pricing strategies of a publisher who offers information good in dual medium (physical, digital) as well as in bundled medium. Consumers are heterogeneous in both valuation for content and preference for medium. We develop optimal pricing strategies and identify the interactive effect of different market characteristics on optimal pricing schemes. We show that offering digital medium only (single component) is optimal under some market conditions, while offering bundle of mediums and digital medium only (partial mixed bundling) is optimal under other market conditions. We find that offering information good in physical medium and in digital medium (pure component) is not optimal when the two mediums are partial substitutes. Moreover, offering only the bundle of mediums (pure bundling) is not optimal as long as physical medium has non-negligible marginal cost. Interestingly, it is always profit enhancing to offer digital medium, even if most consumers in the market prefer physical medium.