The Impact of Digitization on Content Markets: Prices, Profit, and Social Welfare

1 Dec 2020

Information Systems

Shivendu Shivendu, Ran(Alan) Zhang

Published in MIS Quarterly: Management Information Systems, December 2020

The pervasiveness of information technology has led to the digitization of content and this, in turn, has transformed the distribution and consumption of information goods like newspapers, books, music, and movies. However, it is not clear how this wave of digitization of content and the shift in consumers’ preferences for the digital medium will affect publishers, consumers, and society.

Ran (Alan) Zhang, Assistant Professor in the Department of Information Systems and his co-author Dr Shivendu Shivendu of the University of South Florida, built an analytical model to study a publisher’s optimal content pricing and bundling strategies over dual-medium access under different market conditions. They identified two optimal content-medium pricing strategies: (i) the publisher offers information goods or content only in the digital medium under some market conditions, and (ii) under other market conditions, the publisher offers a choice of a bundle of the digital and the physical mediums or only the digital medium. 

“Interestingly, we find that even when the marginal cost of the physical (or bundle) is very high under a wide range of parameter values, the publisher’s optimal strategy is to offer the bundle and the digital rather than to offer only the digital medium,” says Alan Zhang.

The results prescribe and provide guidance for the publisher’s optimal content-medium offering strategy. Their analytical model allows study of the impact of an increasingly larger proportion of consumers adopting digital technologies, or the advent of the digital-native generation. 

“We find that when the proportion of digital-savvy consumers is sufficiently large, consumer surplus and social welfare can decrease, even though the publisher’s profit increases,” Zhang added.

This result informs the ongoing debate in the popular press, which posits that digital consumption increases social welfare. Further, this result has policy implications for regulatory bodies like the Federal Communications Commission, because the prevalence of digitization may be driven by publishers’ profit-enhancing initiatives and may hurt consumer surplus. This may call for the design of an appropriate policy framework that enhances publisher profits together with consumer surplus.