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

The Impact of Digitization on Content Markets: Prices, Profit, and Social
Welfare
Shivendu Shivendu
Muma College of Business, University of South Florida, Tampa, Florida 33620,
shivendu@usf.edu
Ran (Alan) Zhang*

Department of Information Systems, College of Business, City University of Hong Kong, Kowloon,
Hong Kong,
Alan.Ran.Zhang@cityu.edu.hk
* The order of authors is alphabetical, and they contributed equally.
Electronic copy available at: https://ssrn.com/abstract=3367395

The Impact of Digitization on Content Markets: Prices, Profit, and Social Welfare
Abstract
The pervasiveness of the Internet and digitization has revolutionized the delivery and
consumption of information goods. In this paper, we study the impact of digitization and the
shift in consumers’ preferences for the digital medium on outcomes including social welfare in
content markets. We consider a publisher who offers information goods in the physical and the
digital mediums and also in a bundle of physical and digital mediums in a market where
consumers are heterogeneous in both their valuations for content and their preferences for
mediums. We find that the publisher’s optimal content- medium strategy is to offer the content
only in the digital medium under some market conditions, and to offer the content in a bundle
of mediums and the digital medium, under other conditions. Interestingly, while the price of
the bundle of mediums increases with the marginal cost of the physical medium, the price of
the digital medium may decrease when the marginal cost of the physical medium is sufficiently
large. Surprisingly, we find that consumer surplus can decrease as the proportion of digital-
savvy consumers (consumers who prefer the digital medium over the physical medium)
increases, and social welfare may have a discrete decrease when the proportion of digital-savvy
consumers is sufficiently large. Counter to intuition, when more consumers prefer the digital
medium, while the digital price may have a discrete increase, the price of the bundle may have
a discrete decrease.
Key words: Information goods pricing, partial-substitute medium, bundled mediums,
heterogeneous preference for mediums, content market

The Impact of Digitization on Content Markets: Prices, Profit, and Social Welfare
1. Introduction
The advent of the Internet and information technology has led to the digitization of content
industries and, this, in turn, has transformed the distribution and the consumption of
information goods. While traditionally consumers have purchased the physical medium to
access information goods (print newspapers, books, CDs, DVDs, etc.), in a digital era, an
increasing number of consumers buy and consume information goods or content in the digital
medium (digital newspapers, eBooks, album downloads, video downloads, etc.) (Sporkin
2011).
Digitization can potentially expand the consumer base by providing additional
convenience and ease of use through anytime-anywhere access (Koukova et al. 2008). On the
other hand, the digital access to information goods may serve as a substitute for access through
the physical medium, thereby cannibalizing physical sales (Kannan et al. 2009). In addition,
pricing of content over the two mediums varies both within and across content industries. For
example, both The New York Times and The Los Angeles Times offer a choice of home delivery
+ digital or digital-only access, but they do not offer a home delivery-only option. In contrast,
The Washington Post offers only digital access but no bundle. Game Informer magazine offers
print-only and digital-only options separately. Warner Music sells digital-only albums as well
as CDs that come with a digital copy. Independent record labels such as Soulection and Triple
Pop offer only digital albums and tracks (Droppo 2014). An important question for content
publishers is to determine the optimal content pricing strategies over dual-medium access
under different market conditions.
While the physical and digital mediums differ significantly in costs to produce and
distribute, publishers also must consider consumers’ heterogeneous preferences for one
medium over the other. For example, a recent consumer report finds that 38% of consumers
preferred digital access to video games, while 62% of consumers still preferred having a
physical CD of the games (NPD Group 2015). Moreover, the growth of consumption of digital
content by 157% from 2010 to 2014 indicates that the proportion of consumers who prefer the
digital medium is growing over time, and this trend is likely to continue (comScore 2015). The
heterogeneous and evolving consumer preferences toward the two mediums raise new

challenges for publishers on how to price information goods in both physical and digital
mediums. Moreover, it is not clear how this wave of digitization of content and the shift in
consumers’ preferences for the digital medium will impact the publishers, consumers and
society.
Though there is a growing body of literature in IS on information goods pricing (Varian
1995, Choudhary et al. 2005, Dou et al. 2013, Niculescu and Wu 2014), the impact of
digitization of content and the shift in consumer preferences towards the digital medium on the
market outcomes has not received much attention. In this paper, we bridge this gap in literature
by studying the following research questions: (a) What are the publisher’s optimal content-
medium pricing strategies? (b) Are there conditions under which offering content only in the
digital medium is optimal? (c) What is the impact of the shift in consumers’ preferences
towards the digital medium on the publisher’s profit, market coverage, consumer surplus, and
social welfare? (d) How are market prices, demand, consumer surplus and social welfare
impacted by the heterogeneity in consumers’ preferences for the mediums, the marginal cost
of the physical medium, and the partial substitutability between the physical and the digital
mediums?
In our analytical model, a monopolist publisher has the infrastructure to offer
information goods in the physical as well as in the digital mediums. The marginal cost of the
physical medium is non-negligible, but that of the digital medium is negligible (Bakos and
Brynjolfsson 1999, Chen and Png 2003, Sundararajan 2004b, Aron et al. 2006, Cusumano
2007, Balasubramanian et al. 2015). Consumers are heterogeneous in their valuations for
information goods or content (Choudhary et al. 2005, Lahiri and Dey 2013) and have
heterogeneous preferences for mediums (Venkatesh and Chatterjee 2006). In the market, some
consumers prefer the digital medium (we refer to this segment as digital-savvy consumers)
while others prefer the physical medium (we refer to this segment as traditional consumers).
Specifically, if a consumer obtains the information good in the medium he prefers 1, then his
willingness to pay (WTP) is the same as his valuation for the information good, but if he obtains
the information good in the un-preferred medium, then he incurs disutility, and his WTP is
lower than his valuation for the information good. We abstract this medium-mismatch disutility
1
Throughout this paper, our publisher is “she” and consumer is “he.”

experienced by consumers through a medium-mismatch cost parameter. Furthermore, in our
setup, the two mediums are partial substitutes (Venkatesh and Kamakura 2003, Armstrong
2013) which implies that a consumer’s WTP for the content in a bundle of the physical and the
digital mediums is greater than his WTP for content in any individual medium but less than the
sum of his WTP for content in each of the two mediums. We abstract this partial substitutability
of the two mediums through a sub-additive parameter.
We identify 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 some other market conditions, the publisher offers a choice of a bundle of the digital
and the physical mediums or only the digital medium. Our closed-form solution for the optimal
pricing strategy enables us to identify the interactive role of the marginal cost with the
proportion of digital-savvy consumers in the market, the medium-mismatch cost parameter,
and the sub-additive parameter on the market outcomes.
Counterintuitively, we find that the price of the digital medium can decrease when the
marginal cost of the bundle is sufficiently large, though the bundle price always increases with
the marginal cost. In addition, we find that under some conditions, as the proportion of digital-
savvy consumers increases, the price of the bundle and the total market coverage may have a
discrete decrease though the price of the digital medium may have a discrete increase.
Interestingly, while the publisher’s optimal profit always increases as the proportion of digital-
savvy consumers in the market increases, consumer surplus and social welfare can decrease
when a large proportion of consumers prefers to consume content in the digital medium.
Our work contributes to the literature in several streams. This is one of the few papers
in the content pricing literature that develops an analytical model to study the optimal pricing
strategies and the impact of digitization of content on the market outcomes, when the publisher
offers content in the physical, the digital, and a bundle of mediums. We contribute to the extant
content pricing literature by showing that offering content only in the digital medium is optimal
under some conditions, while offering content in a bundle of mediums as well as in the digital
medium is optimal under other conditions (Venkatesh and Chatterjee 2006, Simon and Kadiyali
2007). Our work also contributes to the bundling literature by identifying conditions under

which a single-component strategy (offering content only in the digital medium) is optimal
(McAfee et al. 1989, Venkatesh and Kamakura 2003, Armstrong 2013, Bhargava 2014) 2.
Second, our work contributes to the literature on the pricing of partial substitutes. While
the literature on partially substitutable goods suggests that when the price of one good
increases, the price of the substitute good also increases (Bakos and Brynjolfsson 1999,
Milgrom and Strulovici 2009), we identify conditions under which the opposite is true; that is,
in the context of content-medium markets, under some conditions, as the price of a bundle of
mediums increases, the price of the digital medium has a discrete decrease. Our result is driven
by the characteristics of content markets wherein the marginal cost of offering content in
different mediums is asymmetric and consumers have heterogeneous preferences (and thus
heterogeneous WTP) for the two mediums.
Third, our work contributes to a growing literature on the impact of digitization of
content on prices, market coverage, and profitability (Rob and Waldfogel 2006, Li 2015). We
show that the digital price is closer to the bundle price as more consumers embrace the digital
medium. Moreover, as more consumers become digital-savvy, the digital price increases,
leading to the decrease in the total market coverage. In addition, we find that offering the digital
medium (either in the form of bundle + digital or only the digital) is always profit enhancing
for the publisher, compared to offering only the physical medium or a bundle. Whereas prior
literature and trade articles (Venkatesh and Chatterjee 2006, Harkaway 2012) find that offering
the digital medium together with the physical medium is profit enhancing compared to offering
only the physical medium, we extend this result by showing that under some conditions
offering only the digital medium improves profits.
Fourth, this research contributes to the debate on the impact of digitization on content
markets and society (Esterl 2005, Knight 2015). While prior literature shows consumer surplus
increases when the publisher offers information goods in both physical and digital mediums
(Gentzkow 2007), we extend this result by showing that under some conditions, consumer
surplus decreases when the proportion of digital-savvy consumers in the market is relatively
large. Moreover, while the popular press (Forbes 2013) suggests that the widespread adoption
of the digital medium is likely to lead to the increase in social welfare, we find that, under some
2 See Stremersch and Tellis (2002), and Venkatesh and Mahajan (2009) for a comprehensive review of bundling
literature.

conditions, social welfare may decrease when the proportion of digital-savvy consumers is
sufficiently large. This is because as more consumers prefer the digital medium, the price of
the digital medium may increase, leading to the decrease in market coverage as well as social
welfare.
1.1 Related Literature
In the content pricing literature, empirical as well as analytical research informs our paper. For
example, Simon and Kadiyali (2007) find that offering a digital medium cannibalizes the
demand for print and reduces print sales by 9%. Koukova et al. (2008) find that physical and
digital formats each have advantages in specific usage situations. They employ an experimental
method and show that consumers’ increased awareness of each format’s advantages can
increase demand for a bundle of the two formats. Along these lines, Koukova et al. (2012)
demonstrate that different product formats have distinct attributes (e.g. display ability for print
and search ability for PDF), and therefore, consumers may have higher valuations for the
bundle. A recent paper by Chen et al. (2016) finds that consumers are tied to their preferred
medium, and a delay in the release of the digital medium is unlikely to be effective at sustaining
sales in the physical medium.
Literature in this stream has also studied the changes in the publisher’s market coverage
and consumer surplus when the publisher introduces a digital medium along with a physical
medium. Li (2015) studies the impact of e-Book sales on changes in market coverage, and
finds that the total market expands when the publisher offers e-Books together with print books.
Gentzkow (2007) examines the welfare impact of the introduction of the digital medium and
finds that the consumer surplus increases when the publisher offers both the physical and the
digital mediums.
Although these empirical studies inform some of our theoretical basis, they compare
offering only the physical medium with offering the bundle of the two mediums or offering the
two mediums separately. They do not provide insights for other pricing strategies such as
offering content in a bundle of mediums as well as in the digital medium or offering content
only in digital medium. Our study develops an analytical model that abstracts consumers’
heterogeneous preferences over mediums and analyzes all of the publisher’s possible content-
medium pricing strategies.

Kannan et al. (2009) study the impact of introducing the digital medium (PDF) and the
bundle of the two mediums on the revenue of the physical medium and on the total revenue of
the publisher. Our analytical work is different from their empirical work in the following three
aspects: (1) While they compare offering all three forms (print, PDF, and the bundle) with
offering only the print form, we compare all seven of the publisher’s possible content-medium
strategies. In addition, while they have not examined the optimal content-medium strategy for
the publisher, we prescribe the optimal strategies under different market conditions. (2) They
find that the introduction of the bundle and the PDF form cannibalizes the print sales but
increases the total revenue of the publisher. We find that under some market conditions,
offering the bundle and the digital medium but not the physical medium is profit enhancing
and is the optimal strategy, while under other market conditions, offering only the digital
medium is the optimal strategy. (3) We examine the impact of an asymmetric cost structure of
the two mediums on the optimal prices, and the impact of the increases in the proportion of
digital-savvy consumers on the publisher’s optimal prices, profit, consumer surplus, and social
welfare. Kannan et al. (2009) have not discussed the impact of such market conditions on the
publisher, consumers, and society.
An analytical study by Venkatesh and Chatterjee (2006) examines a monopolist
publisher’s profitability of offering content in either the physical medium only or the physical
as well as the digital mediums. Our paper is distinct from their paper in the following two
aspects. First, they do not examine the optimality of offering a bundle of the mediums, a
frequently observed content-medium pricing strategy (Koukova et al. 2012, Pew 2012). Since
they do not consider a bundle of mediums, their model does not abstract sub-additivity when
consumers access content in dual mediums (Koukova et al. 2008, Kannan et al. 2009). Second,
we provide closed-form solutions for the publisher’s optimal pricing schemes, a strategy which
enables us to analyze the impact of changes in market characteristics on prices, profit, and
market coverage, as well as on consumer surplus and social welfare.
Our study is also broadly related to literature on bundling in general and bundling of
two mediums in particular. Though there is a vast literature on bundling, we limit our attention
to bundling research that is relevant in the context of content markets. In this literature, the
term “pure bundle” refers to the situation in which the firm sells only a bundle of two products;
the term “pure component” refers to the situation in which the firm sells the two products

separately; the term “single component” refers to the situation in which the firm sells only one
product (either product 1 or product 2); the term “partial mixed bundling” refers to the situation
in which the firm sells a menu of the bundle and one product, and the “full mixed bundling”
refers to the situation in which the firm sells a menu of the bundle and each individual product
(bundle, product 1, product 2).
Some early works in bundling (Stigler 1963, Adams and Yellen 1976) illustrate that
bundling can serve as a useful price discrimination technique, and mixed bundling can be more
profitable than a pure component strategy. While Adams and Yellen (1976) suggest that
bundling is profitable when valuations for the two products are negatively correlated,
Schmalensee (1984) illustrates that bundling can increase profits when the valuations of the
two products are independent, or even positively but not perfectly correlated. McAfee et al.
(1989) analyze the bundling strategy for the multiproduct monopolist when the products have
positive marginal costs and consumers’ valuations are independently distributed; they derive
conditions under which mixed bundling either dominates pure component pricing or weakly
dominates pure bundling.
Although these studies provide insightful results about the optimality of the mixed
bundling, these results cannot be readily applied in the context of the bundling of mediums.
While in McAfee et al. (1989) consumer valuations for the two products are independently
distributed, in the context of content pricing under dual medium access, bundling of the two
mediums with the same content suggests that consumers’ valuations for the content in two
mediums are likely to be correlated. In addition, some studies (Schmalensee 1984, McAfee et
al. 1989) consider only the additive valuation for a bundle of the two goods, while dual-medium
access is likely to regard WTP for the bundle as sub-additive because the same content is
accessed by consumers in both the mediums.
Another stream of literature has studied a firm’s bundling strategy for multiple products
(Bakos and Brynjolfsson 1999, Armstrong 1999). When a monopolist offers a large number of
information goods, and consumers have independent valuations for the individual goods,
asymptotic results show that if the marginal cost of goods is negligible, then selling a bundle
of all information goods can be superior to selling them separately, and if the marginal cost is
positive, then selling the goods separately is optimal (Bakos and Brynjolfsson 1999). However,
in a competitive market, bundling can create “economies of aggregation” for information goods

if their marginal costs are very low (Bakos and Brynjolfsson 2000). Armstrong (1999) studies
the optimal selling strategy for a monopolist who offers a large number of physical products
with a positive marginal cost for each product. If consumers’ tastes are correlated across
products, the monopolist can implement a close-to-optimal tariff as a menu of two-part tariffs.
Geng et al. (2005) develop a model wherein the valuation of information goods decreases as
the quantity consumed increases and find that if consumers’ valuations for subsequent products
decrease quickly, then bundling of information goods is suboptimal. Our study is different from
this stream of literature because we study the pricing strategy of a monopolist who can offer
content in dual mediums wherein the marginal cost is zero for the digital medium and is
positive for the physical medium.
Prior research that has studied the bundling strategy of a firm who offers the digital
content on multiple devices (Bhargava 2014) wherein consumers have heterogeneous
valuations for devices. Bhargava (2014) recommends that when consumers’ valuations for
devices are vertically differentiated and positively correlated, full mixed bundling, partial
mixed bundling, or pure bundling can be optimal under different conditions. On the other hand,
when consumers’ valuations for devices are horizontally differentiated and negatively
correlated, full mixed bundling is always optimal. While that paper focuses on a publisher who
offers only digital content on multiple devices, we study a situation in which the publisher can
offer content in two mediums (the physical and the digital) which have asymmetric costs. Since
in the content market some consumers have a higher valuation for content in the physical
medium than in the digital medium and vice versa (Newspaper Association of America 2012,
NPD Group 2015), it is appropriate to model consumers’ preferences for the physical and
digital mediums as horizontally differentiated; and consumers’ valuations for the content as
heterogeneous and uniformly distributed (vertically differentiated). Moreover, while Bhargava
(2014) focuses on two separate cases, one of vertically differentiated preferences (all
consumers prefer device 1 to device 2) and the other of horizontally differentiated preferences
(some consumers prefer device 1 and others prefer device 2), our abstraction is more general.
In our model, consumer preferences are both vertically as well as horizontally differentiated
(the traditional segment prefers physical to digital, and the digital-savvy segment prefers
digital to physical; the population consists of two horizontally differentiated segments).

Due to the key differences in the abstraction of consumer preferences which are more
appropriate in our context, while Bhargava (2014) finds full mixed bundling to be optimal
under the horizontal differentiation case, in our context (consumers are both vertically as well
as horizontally differentiated), either offering only the digital (single component) or offering
the bundle and the digital medium (partial mixed bundling) is optimal. In addition, our
analytical approach lends to the closed-form solutions which allow us to study how changes in
the market parameters (such as the proportion of digital-savvy consumers and marginal cost)
affect the market outcomes and social welfare.
Prior literature also examines bundling of complementary or substitutable products.
Lewbel (1985) suggests that because the components of a bundle can be either complementary
or substitutable, consumers may have either a super-additive or a sub-additive valuation for the
bundle. They numerically prove that bundling can be optimal even when components are
substitutable. Venkatesh and Kamakura (2003) study a monopolist’s bundling strategy and
compare pure bundling with mixed bundling when the two products are either substitutes or
complements. They numerically find that pure bundling is optimal if the two products are
strong complements. Armstrong (2013) finds that when the component goods are partially
substitutable, a firm has an incentive to offer a bundle discount in at least as many cases as
with the model with an additive-value of the bundle. Though these studies offer valuable
insights regarding bundling of complementary or substitutable goods, none of them considers
a positively correlated demand of the component goods or examines partial mixed bundling
and single component strategies.
Recent literature studies the optimality of bundling under different market contexts
including hybrid bundling of goods and services (Meyer and Shankar 2016), bundling
information products (Hui et al. 2012; Raghunathan and Sarkar 2016; Zhang et al. 2016),
bundling vertically differentiated products (Honhon and Pan 2017), multi-stage bundling
(Prasad et al. 2017), and bundling in a competitive marketplace (Raghunathan and Sarkar 2016;
Zhou 2017). Eckalbar (2010) studies the closed-form solution of the optimal bundling strategy
for a monopolist who sells two distinct products with independently distributed valuations. Hui
et al. (2012) develop a model wherein the consumer’s willingness to pay (WTP) is
heterogeneous in the initial WTP for the first unit and the marginal WTP for additional units,
and explain the opposing effects of the two dimensions of consumers’ heterogeneity on the
10

optimal bundling strategies and prices of information goods over time. While Raghunathan and
Sarkar (2016) examine the bundling strategies of a duopoly in the information market where
each seller offers two (or more) types of information products, Zhang et al. (2016) model
competition between two firms in the presence of network effects wherein the firms can either
offer a free core product and a paid service or offer them as a bundle. Zhou (2017) proposes a
framework for studying the superiority of pure bundling in the oligopoly market and Honhon
and Pan (2017) show that a firm selling vertically differentiated components can improve
profits by offering them as a bundle compared to selling them separately, even when the
components are viewed as substitutes.
The rest of the paper is organized as follows. In §2, we describe the model and market
coverage profiles. In §3, we present the optimal content-medium pricing strategies. In §4, we
analyze comparative statistics and present extensions and analyses for relaxing some of our
model assumptions, and in §5 we discuss the contributions, managerial implications, and
limitations and conclusion.
2. Model
The market consists of a publisher of information goods, such as a newspaper publisher, a
music label, a video game developer, a movie studio or a book publisher who has the ownership
rights over the content. Given that each publisher has unique content and editorial style,
following prior literature (Chen and Png 2003, Venkatesh and Chatterjee 2006, Wei and Nault
2014), we model the content publisher as a monopolist. Moreover, we assume that the cost of
acquiring or developing content is sunk (Wu and Chen 2008), and the fixed costs of creating
the physical infrastructure and the digital infrastructure are sunk (Bakos and Brynjolfsson
1999, Chen and Png 2003, Aron et al. 2006). Consumers derive value from consumption of the
content, but they can consume the content only if it is provided in some medium (Nielsen
2014). The publisher can provide the content either in the physical medium such as the paper-
edition of a newspaper, magazine, CD, video game in a box, or book, or in the digital medium
such as digital access to the newspaper or magazine, a downloadable video game or music, or
an eBook. The publisher can also offer the content in both mediums as a bundle, so that
consumers can consume it in either medium.
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The publisher incurs a marginal cost c p  (0,1) to serve a consumer to whom she
provides content in the physical medium. The marginal cost of the physical medium includes
material costs, handling and shipping costs, and labor costs. On the other hand, the publisher
incurs zero marginal cost to serve a consumer to whom she provides content in the digital
medium (Bakos and Brynjolfsson 1999, Chen and Png 2003, Sundararajan 2004b, Aron et al.
2006, Balasubramanian et al. 2015)3. When the publisher offers content in a bundle of the
digital and the physical mediums to a consumer, then she incurs the same marginal cost as in
the case of offering the content in only the physical medium, i.e., c p . We denote the price
charged by the publisher for content in a physical medium as p p , the price for content in a
digital medium as pd and the price for content in a bundle of mediums as pb . To keep the
focus of this research on optimal content-medium pricing strategies, we assume that all
infrastructural costs for providing content in a physical or a digital medium are sunk, and the
publisher has no supply-side constraints.
2.1 Consumers
The market consists of a unit mass of consumers. Consumers’ valuations ( v ) for the content
are independent and are uniformly distributed, i.e. v U [0,1] (Lang and Vragov 2005, Dou et
al. 2013). A recent study by the Newspaper Association of America (NAA) finds that around
60% of readers read content in print, 48% of readers read content in digital formats and 34%
read content in print as well as in digital mediums, wherein each medium “provides somewhat
different functional and experiential qualities fitting some usage occasions better than others”
(Newspaper Association of America 2012). A recent consumer report finds that while some
consumers prefer video games in a digital medium, others prefer video games in a physical
medium (NPD Group 2015). These studies indicate that population consists of two segments;
a segment of consumers prefers the digital medium over the physical medium while the other
segment of consumers prefers the physical medium over the digital medium.
We model consumers’ preferences for mediums by segmenting the market wherein r
proportion of consumers prefers the digital medium (digital-savvy consumers), i.e. r  (0,1) ,
and 1  r proportion of consumers prefers the physical medium (traditional consumers)
3 In §4.7, we discuss the implications on our results, if this assumption were to be relaxed.
12

(Kannan et al. 2009). The heterogeneous preferences for the access to the content in the two
mediums may be rooted in the inherent differences of the two mediums. For example, the
digital medium has different features and functions, interface, touch and feel, ease of use and
convenience of access compared to the physical medium. These inherent differences in the
characteristics of the two mediums may lead to the different WTP among consumers for access
to the content in the two mediums. We abstract these heterogeneous preferences for mediums
through a mismatch cost parameter  .
A consumer who has valuation v for the content has WTP v for the access to the
content if he is offered the content in the medium he prefers. On the other hand, if a consumer
is offered the content in the medium that he does not prefer, then he incurs a medium-mismatch
cost   (0,1) . This implies that a consumer who has valuation v for the content has a lower
WTP for the access to the content, i.e., v(1   ) , if he is offered the content in his un-preferred
medium. We assume that the mismatch cost is homogeneous across all consumers. In §4.4, we
relax the assumption of the homogeneous mismatch cost for all consumers and assume
consumers have a continuously distributed heterogeneous mismatch cost. We numerically
examine the impact of such a heterogeneous mismatch cost on our results and show that our
key results continue to hold. Moreover, our conceptualization also implies that consumers’
WTPs in the two mediums are perfectly correlated. In §4.6 we relax this assumption and show
through a numerical analysis that our results hold even when the WTPs for content in the two
mediums are asymmetric and independent.
Our modeling approach of segmenting the market in two distinct groups is similar to
the one adopted in the literature in operations research. Hsiao and Chen (2014) categorize
consumers into one of two segments based on their preference for purchasing online or
purchasing in a retail store. Consumers in the first segment have a higher utility from
purchasing in a retail channel (utility v for purchasing in a physical store, and utility 1v for
purchasing online, where 1  1 ), whereas consumers in the second segment obtain a higher
utility from purchasing online (utility v for purchasing in a physical store, and utility  2 v for
purchasing online, where 2  1 ). Tan and Carrillo (2014) utilize a non-negative consumer
acceptance level parameter to capture consumers’ perceptions of digital goods relative to
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traditional goods. If the consumer acceptance level parameter is less than 1, it represents the
situation in which consumers prefer traditional goods to digital goods and vice versa.
When the publisher offers the content in both mediums as a bundle, consumers’ WTP
for the content in a bundle of mediums is sub-additive. This implies that consumers view the
access of content in the physical medium and the digital medium as partial substitutes (PWC
2008). This abstraction of dual-medium access of content is similar to the consumers’ degree
of contingency modeled in Venkatesh and Kamakura (2003) where the reservation price of a
bundle of two products is less than the sum of the stand-alone reservation price of the two
products, if the products are substitutes. This abstraction is further supported by empirical
evidence. For example, Gentzkow (2007) shows that raising the price of the physical
newspaper increases the viewership of the digital newspaper. Li (2015) verifies the partial
substitutability of the two content mediums by showing that sales of eBook increase at the
expense of cannibalizing print book sales.
We abstract this sub-additive characteristic of the valuation of content in a bundle of
mediums through a parameter   (0,1   ) such that a consumer’s WTP for content in a
bundle of mediums is v   v  v(1   ) . This conceptualization is similar to the modeling
approach of bundling of substitutes in prior literature (Lewbel 1985, Venkatesh and Kamakura
2003, Armstrong 2013). Parameter  can also be interpreted as the additional convenience
that consumers experience, if they have a choice of consuming the content in either medium.
For analytical tractability, we assume that the sub-additive parameter  is homogeneous
across all consumers. While Venkatesh and Kamakura (2003) make this assumption to get a
closed-form solution, this abstraction is also similar to the constant value dependence
assumption in McGuire and Staelin (1983) and to the analysis of substitute goods in Bakos and
Brynjolfsson (1999). Note that if the content is offered in a bundle of mediums, then digital-
savvy as well as traditional consumers have no medium-related heterogeneity because they get
content in both mediums. Note that     1 , because the WTP for content in a bundle is sub-
additive, i.e., v(1   )  v  v(1   ) . In §4.5 we relax the assumption of sub-additivity and
examine the impact on our results, when the mediums are perceived as complements or super-
additive.
14

A model in which there are no consumer segments but all consumers’ preferences
for the two mediums are ordered can be conceptualized as a special case of our setup.
Without loss of generality, one may assume that all consumers have valuation v for the
physical medium, and have valuation  v for the digital medium, where   1 and
v U[0, w1 ] . Furthermore, the valuation of the bundle is sub-additive, i.e. v(1   ) , where
   . This alternative conceptualization is similar to our model setup with r  0 (i.e. all
consumers are traditional consumers),   1   and w1  1 .
2.2. The possible pricing strategies and market coverage profiles4

The publisher’s optimal content-medium pricing strategy takes into account consumer
heterogeneities and costs of offering the content in either of the mediums or in a bundle of
mediums. The publisher has seven possible pricing strategies: offer content in (1) the physical
medium only; (2) the digital medium only; (3) the physical and in the digital medium; (4) a
bundle; (5) a bundle as well as in the physical medium and in the digital medium; (6) a bundle
and in the physical medium and (7) a bundle and in the digital medium.
In order to focus our analysis on only those pricing strategies that may be optimal under
different values of parameters (  ,  and r ) and the marginal cost, we first rule out those
strategies that are suboptimal. Since a bundle has a higher valuation for all consumers
compared to a physical medium, and the marginal costs of the bundle and the physical medium
are the same, the strategy of offering the content only in a bundle dominates the strategies of
offering the content only in the physical medium, or in a bundle and in the physical medium,
or offering the content in the physical medium as well as in the digital medium, or in a bundle
as well as in the physical medium and in the digital medium. (See Lemma 1A and the proof in
Appendix B.)
Proposition 1: The pricing strategy of offering content in a bundle of mediums and the digital
medium strictly dominates the pricing strategy of offering content only in a bundle of mediums.
When the publisher offers content only in a bundle, then the optimal price for the
bundle is pb  (1    c p ) / 2 . Now, suppose the publisher offers content in the digital medium
in addition to the bundle, and sets the same bundle price as when she offers only the bundle
4 We use “Profile” to denote a market coverage profile in the rest of the paper.
15

and sets the digital price at 1/ 2 , i.e., pd  1/ 2 . We show that the publisher is strictly better
off by offering the content in the digital medium in addition to the bundle compared to offering
content in the bundle only (See proof of Proposition 1 in Appendix B). This result is not
obvious because one might think that, since the bundle and the digital are partial substitutes, it
may not be optimal to offer them together. The reason for this counter-intuitive result is as
follows.
When the marginal cost of the bundle is relatively small, the traditional consumers buy
only the bundle (do not switch to buying the digital medium), but some digital-savvy
consumers who do not buy when only the bundle is offered, now buy the digital. Therefore,
the market coverage increases and the publisher gains additional profit from the digital-savvy
consumers without cannibalizing the profit from the traditional consumers, the publisher is
better off. When the marginal cost of the bundle is relatively large, the bundle price is high.
When both the bundle and the digital are available to consumers, not only the digital-savvy
consumers but also some traditional consumers who do not buy when only the bundle is
available, now buy the digital medium, and some traditional consumers who buy the bundle
when only the bundle is available, now switch to buying the digital medium. This leads to the
increase in the market coverage for both types of consumers, and the publisher also saves on
the marginal cost. The profit gain from the increased market coverage from both types of
consumers and from the savings on the cost outweighs the revenue loss from consumers who
switch from the bundle to the digital medium.
From the analysis above, we need to focus only on the two content-medium pricing
strategies, i.e., offering the digital medium and the bundle, and offering only the digital
medium. When the publisher offers content in a bundle as well as in the digital medium, the
consumers’ purchase decisions are based on their individual rationality (IR) and incentive
compatibility (IC) constraints for each of the consumer types. We derive all possible market
coverage profiles and based on the comprehensive analysis in Appendix B, we show that only
one of the following four market coverage profiles is potentially optimal under a specific
parameter space. Under Profile 1, while traditional consumers buy the bundle, some digital-
savvy consumers buy the bundle and some buy the digital ( T  b and DS  b & d ). Under
Profile 2, traditional consumers buy only the bundle and digital-savvy consumers buy only the
16

digital ( T  b and DS  d ); Under Profile 3, some traditional consumers buy the bundle and
some buy the digital and digital-savvy consumers buy only the digital ( T  b & d and DS  d
). Under Profile 4, both types of consumers buy only the digital medium ( T  d and DS  d ).
We present the summary of notations in Table 1 and show the four potentially optimal demand
profiles in Figure 1.
Table 1: Summary of Notations
Notation Definition Notation Definition
T Traditional consumers DS Digital-savvy consumers
b Bundle d Digital
pb Price of the bundle pd Price of the digital
pp Price of the physical  The sub-additivity parameter
 The mismatch parameter r Proportion of digital-savvy consumers
Marginal cost of physical

cp v Consumer’s valuation for the content
medium
Traditional consumers’ Digital-savvy consumers’ demand for
DbT DbDS
demand for the bundle the bundle
Traditional consumers’ Digital-savvy consumers’ demand for
DdT DdDS
demand for the digital the digital
17

Figure 1: (i) Profile 1: T  b and DS  b & d ; (ii) Profile 2: T  b and DS  d ; (iii)
Profile 3: T  b & d and DS  d ; and (iv) Profile 4: T  d and DS  d
Our solution approach consists of four steps. In the first step, we examine all the
possible demand profiles, and rule out those demand profiles that are suboptimal based on our
model setup. Second, for those demand profiles which may be optimal, we derive the profit
function and the feasibility conditions for each demand profile. Please note that under our
model setup, the profit function for each profile is a bivariate quadratic function with respect
to the bundle and the digital prices. Since this function describes a quadratic surface, if the
function has a maximum, then the maximum must lie at the vertex of the surface. If the vertex
point is not feasible (i.e. the conditions for the demand profile to be feasible are not met under
the vertex prices), then there is no maximum under such demand profile. The prices of the
bundle and the digital derived from FOCs (first order conditions) for each demand profile and
checked for maximum by SOCs (second order conditions) generate the maximum profit under
that demand profile. In the third step, we characterize the feasibility conditions under that
demand profile given the prices derived from the FOCs. These prices are candidates for optimal
prices only if the feasibility conditions for that demand profile are met given these prices. Note
that if for any demand profile, the feasibility conditions for that demand profile are not met by
18

the prices given by the FOCs, then the corner solution may be optimal for that demand profile.
In our analysis, we find that the feasibility conditions for each of the four possible demand
profiles are met given the prices derived from the FOCs for that profile (See proof of
Propositions 2a to 2f in Appendix B). This rules out the optimality of the corner solutions. In
the fourth step, we partition the entire parameter space into regions by comparing the feasibility
conditions of demand profiles and find a particular pricing scheme (set of bundle and digital
price) that provides the maximum profit in each region.
We operationalize our above described approach as follows. We first derive the optimal
bundle and digital prices under each demand profile by solving the FOCs and then checking
for the maximum by the SOCs. Second, given the optimal prices under each demand profile,
we rewrite the feasibility conditions by plugging in the derived prices. Third, we compare the
feasibility conditions across any two demand profiles to determine if there is any overlapping
region. If there is an overlapping region, we then compare the maximum profits derived from
the two demand profiles to determine the optimal profit and the optimal prices under the
overlapping region.
3. The optimal content-medium pricing strategy
We know from the analysis in §2 that Profiles 1, 2 and 3 correspond to the publisher’s strategy
of offering the bundle and the digital medium (partial mixed bundling), and Profile 4
corresponds to the publisher’s strategy of offering only the digital medium (single component).
LEMMA 1: The publisher’s optimal content-medium strategy is to offer content in a bundle,
and in the digital medium (partial mixed bundling) or in the digital medium only (single
component), and for any feasible parameter space, the optimal pricing scheme is from the set
P  , P  , P  , where P   p
I
* *
II
*
III I
* d*
I  1/ 2, pIb*  (1  c p   ) / 2 ,
 1     cp 1   d* 1 

PII*   pIId*  , pIIb*    , and PIII   pIII 
*
.
 2  2r 2 2  2r   2  2r 
Note that optimal pricing scheme PI* corresponds to Profile 1 or 2, pricing scheme PII*
corresponds to Profile 3 and pricing scheme PIII* corresponds to Profile 4. It is easy to see
from Lemma 1 that the price of the digital medium in the pricing scheme PI* is higher than
that in pricing schemes PII* and in PIII* . On the other hand, the price of the bundle in pricing
19

scheme PI* is lower than that in pricing scheme PII* and the publisher does not offer a bundle
in pricing scheme PIII* . In order to figure out the parameter space under which a particular
pricing scheme is optimal, we compare the feasibility conditions for Profiles 1, 2, 3, and 4 (see
proof for Proposition 2a – 2g in Appendix B).
We present our results in §3.1 in §3.2 by first segmenting the parameter space on the
mismatch cost parameter  and then on the subadditivity parameter  , and then on the
proportion of digital-savvy consumers r and the marginal cost of the physical medium c p . The
division of the parameter space for the presentation of results is driven by the convenience of
exposition. At the end of Appendix B, we present the set of conditions in which pricing scheme
PI* , PII* and PIII* respectively is optimal.
3.1. Optimal pricing schemes when  is larger than 1/ (1  r )
The condition on the mismatch cost parameter, i.e.,   1/ (1  r ) , implies that   0.5 because
r  (0,1) .
PROPOSITION 2a: If the mismatch parameter  is such that   1/ (1  r ) , then the
publisher adopts pricing scheme PI* for the entire feasible parameter space.
The economic reasoning for Proposition 2a is as follows. From Lemma 1, the price of
the digital decreases with  and is lower in pricing schemes PII* and PIII* than in PI* , for any
  (0,1) . This implies that given a large  , if the publisher were to adopt PII* or PIII* , then
the price of digital has to be lower. When the publisher considers adopting pricing scheme PII*
or PIII* instead of PI* , her tradeoff is between reducing the cost by selling the digital instead of
a bundle to traditional consumers and reducing the revenue from (1) digital-savvy consumers
by reducing the digital price and (2) traditional consumers by incentivizing them to switch to
the digital medium. When the mismatch cost parameter  is large, the reduction in revenue
from both segments of consumers outweighs the reduction in cost by selling the digital to
traditional consumers. Therefore, the publisher is better off by adopting PI* , rather than PII* or
PIII* , even when the marginal cost is high.
20

The condition in Proposition 2a also implies that pricing scheme PI* can be optimal for
either small or large r as long as this proportion is above the threshold, i.e. r  (1   ) /  .
When the mismatch cost parameter is very large, even if the proportion of digital-savvy
consumers is small and the marginal cost of a bundle is high (leading to high price of a bundle),
the publisher is better off by offering pricing scheme PI* under which the traditional consumers
buy only the bundle for which they have a higher WTP, rather than the digital, for which they
have a lower WTP.
3.2. Optimal pricing schemes when  is not larger than 1/ (1  r )
Now, we describe the optimal pricing schemes when the medium-mismatch cost parameter ( 
) is not larger than 1 / (1  r ) which implies that  can take any value between 0 and 1 . We
group the results around the value of  and describe the optimal pricing scheme in the entire
feasible parameter space which is divided by some technical thresholds of parameters  , c p
and r that are reported in Lemma 3A in Appendix B.

3.2.1. Optimal pricing schemes when the mismatch cost parameter is large (
0.445    1/ (1  r ) )
PROPOSITION 2b: If (I) 0.5    1/ (1  r ) or (II) 0.445    0.5 and   1 , then the
publisher’s optimal content-medium strategy and pricing schemes are characterized in the
following table:
cp (0, c p1 ] (c p1 , c p 2 ] (c p 2 ,    ] (   , c p 3 ] (c p3 ,1)
r
(0, r0 ] PI* : bundle  digital PII* : bundle  digital PIII* : digital only
(r0 , r1 ] PI* : bundle  digital PII* : bundle  digital PIII* : digital only
(r1, r2 ] PI* : bundle  digital PIII* : digital only
(r2 , 1) PI* : bundle  digital
Proposition 2b reports the publisher’s optimal content-medium offering strategy and

the corresponding optimal pricing scheme when the mismatch cost is either large (
0.5    1/ (1  r ) ) or when the mismatch cost is relatively large together with the large sub-
additive parameter, i.e. 0.445    0.5 and   1 . Under these conditions, when the marginal
21

cost is high and the proportion of the digital-savvy consumers is from small to moderate, i.e.
    c p  1 and 0  r  r1 , or c p3  c p  1 and r1  r  r2 , the publisher offers the content
only in the digital medium and adopts the pricing scheme PIII* . Interestingly, when the marginal
cost is high and the proportion of the digital-savvy consumers is large ( c p 3  c p  1 and
r2  r  1), the publisher offers both the digital medium and a bundle of the two mediums.
When the proportion of digital-savvy consumers is relatively small ( 0  r  r1 ) and
the marginal cost of the bundle is high (     c p  1 ), if the publisher continues to offer PII*
, then on the one hand, due to the high price of the bundle, the demand for the bundle is low;
and on the other hand, due to the high marginal cost, the profit margin from each unit of the
bundle is low. This leads to a low profit. By shifting to the strategy of offering content only in
the digital medium, the publisher can save on the high marginal cost. Therefore, the publisher
is better off by offering only the digital medium and adopts PIII* .
Interestingly, when the proportion of digital-savvy consumers is moderate ( r1  r  r2
) and the marginal cost of the bundle is high ( c p 3  c p  1), the publisher shifts from offering
the pricing scheme PI* to offering the pricing scheme PIII* (third row of the table in Proposition
2b) wherein she stops offering the bundle and lowers the price of the digital medium (
PIIId *  PId * ). This is because if the marginal cost is high, then the publisher may be better off
by not offering the bundle. Moreover, a lower digital price ( PIIId * ) incentivizes more traditional
consumers who have lower WTP for the digital to buy the digital medium. In this case, the
profit gain from the cost saving and the increased market coverage from the traditional
consumers overweighs the profit loss from the reduced profit margin because of the lower
digital price. Therefore, the publisher is better off by offering only the digital medium to all
consumers at a lower digital price ( PIIId * ).
One might think that when the proportion of digital-savvy consumers is large and the
marginal cost of the bundle is high, then the publisher will be better off by offering only the
digital medium. Counter-intuitively, we find that when the proportion of digital-savvy
consumers is large ( r  r2 ), the publisher is better off by offering a menu of the bundle and the
22

digital and adopting pricing scheme PI* , even if the marginal cost of the bundle is very high (
c p3  c p  1 ). The reason for this interesting result is that when there is a large proportion of
digital-savvy consumers in the market, the publisher can gain a higher profit from them by
charging a higher digital price ( 1/ 2 ) under PI* . But the higher digital price makes the digital
medium less attractive compared to the bundle, especially to the traditional consumers who
have a lower WTP for the digital. When the publisher offers only the digital medium at a high
price, then fewer traditional consumers buy the digital medium. Therefore, the publisher is
better off by offering a menu of the bundle and the digital which allows the traditional
consumers to buy the bundle for which they have a higher WTP, rather than to buy the digital
for which they have a lower WTP. Therefore, the publisher gains a higher profit from both
types of consumers. The tradeoff is that the cumulative gain of the high profit from the large
proportion of digital-savvy consumers, and from the increased demand from the traditional
consumers, outweighs the loss due to the high marginal cost of the bundle. This leads to the
optimality of offering a menu of the bundle and the digital-only with pricing scheme PI* .
In the parameter regions in which it is optimal to offer a menu of the bundle and the
digital, the publisher offers PI* or PII* under different conditions. When the marginal cost is
moderate ( c p  (c p1 ,   ] ) and the proportion of digital-savvy consumers is small ( r  r0 ),
the publisher’s optimal pricing strategy is to switch from PI* to PII* wherein the traditional
consumers buy the bundle and the digital but the digital-savvy consumers buy only the digital
(Profile 3, Figure 1). This is because the publisher’s gain from saving on the marginal cost by
incentivizing both consumer segments to buy the digital is higher than her loss from the digital-
savvy consumers who are offered the digital at a lower price.
PROPOSITION 2c: If 0.445    0.5 and   1 , then (a) when r  (0, r1 ] , the publisher’s
optimal pricing strategies remain the same as presented in the first two rows of the table in
Proposition 2b; and (b) when r  (r1,1) , the publisher adopts PI* if c p  (0, c p 3 ] , and adopts
PIII* if c p  (c p3 ,1) .
Proposition 2c describes the optimal pricing schemes when the mismatch cost
parameter is relatively large ( 0.445    0.5 ) and the sub-additive parameter is relatively
23

small (   1 ). In this scenario, the threshold r2 does not play a role because r2  1 . When r
is relatively large ( r  (r1 , 1] ), the publisher’s optimal pricing scheme is PI* if the marginal
cost is low, and is PIII* if the marginal cost is high. Pricing scheme PII* is not optimal for any
value of c p . This is because when both  and  are not sufficiently large, the difference in
traditional consumers’ WTP for the bundle and for the digital is not large. The same applies
for the digital-savvy consumers. Therefore, when r is relatively large, the publisher is better
off by offering PI* wherein she gains more revenue from digital-savvy consumers, if c p is not
large. On the other hand, if c p is large, then the publisher switches to PIII* and does not offer
the bundle to economize on cost.

3.2.2. Optimal pricing schemes when the mismatch cost parameter is moderate to small
( 0    0.445 )
In this scenario, we identify the regions in which pricing scheme PI* , PII* , or PIII* is optimal
when (i) the mismatch cost parameter (  ) is moderate (   ((1.5  1.25), 0.445) ), and the
sub-additive parameter (  ) is large (    2 ), or (ii)  is relatively small (
  (0.333, 1.5  1.25) ), or (iii)  is small (   0.333 ) and  is relatively small (   3 ).
The detailed analysis and regions are in Propositions 2d to 2g in Appendix B. Note that unlike
Propositions 2b and 2c, in this case we have all three pricing schemes across the entire
parameter spaces of the marginal cost ( c p ) and the proportion of digital-savvy consumers ( r ).
This is because when  is small or moderate, it implies that the difference between traditional
consumers’ WTP for the digital and digital-savvy consumers’ WTP for the digital is relatively
smaller than in the case described in Propositions 2b and 2c. In other words, the two types of
consumers become closer in their WTP. This implies that the role of the proportion of one type
of consumers is not dominant enough to rule out either PII* or PIII* under any parameter space
of c p and r .
3.3. Optimal pricing schemes under feasible parameter regions
24

We now use two dimensional region plots based on the conditions described in Proposition 2a
to 2g to provide further insights for regions in which offering digital only or offering a menu
of a bundle and digital only is optimal along with the optimal pricing schemes.
Figure 2: Optimal pricing schemes in the proportion of digital-savvy consumers ( r ) and

marginal cost ( c p ) space (   0.3 ) (i): when the medium-mismatch parameter is small (
  0.1 ) (ii): when  is large (   0.6 ).
Figure 2 (i) illustrates the optimal content-medium strategy and pricing schemes in
different regions of r - c p space when the mismatch cost parameter is small (   0.2 ).
Irrespective of the proportion of digital-savvy consumers ( r ), if the marginal cost is moderate
to large ( c p  (0.4, 1) ), then the publisher is better off by offering only the digital medium at
pricing scheme PIII* .
Figure 2 (ii) illustrates the optimal content-medium strategy and pricing schemes when
the mismatch cost parameter is large (   0.6 ). Comparing the optimal content-medium
strategy under small  (Figure 2 (i)) with that under large  (Figure 2 (ii)), when the marginal
cost is large ( c p  (0.4, 0.9) ), the publisher is better off by offering only the digital medium
when  is small, but she is better off by offering both the bundle and the digital when  is
large. When the mismatch cost is large, traditional consumers have a much lower WTP for the
digital compared to that for the bundle. If the publisher continues to offer the digital medium
only, then she has to reduce the digital price significantly to incentivize some traditional
25

consumers to buy the digital. The reduced digital price leads to the low profit margin from both
types of consumers. Hence, the publisher is better off by offering both the bundle and the digital
medium at pricing scheme PI* such that all the traditional consumers who buy choose the
bundle. Since the publisher’s margin from selling the bundle is large, she is better off.
Interestingly when the marginal cost is very large ( c p  (0.9, 1) ), and the proportion
of digital-savvy consumers is large ( r  (0.55, 1) ), the publisher is still better off by offering
the bundle and the digital medium. This is counter-intuitive because one may expect that the
publisher would not offer the bundle when the marginal cost of the bundle is very high. The
intuition for this surprising observation is as follows.
The digital-savvy consumers have a higher WTP for the digital than the traditional
consumers have. When the proportion of digital-savvy consumers in the market is large, the
digital-savvy consumer segment is relatively more important to the publisher. The publisher is
better off by charging a higher digital price, which she can do under pricing scheme PI* ,
wherein the digital price is higher than that under PIII* . Thus, the publisher gets a higher profit
from the large proportion of digital-savvy consumers. However, when the price of the digital
medium is high, very few traditional consumers buy the digital because they have a low WTP
for the digital (because the mismatch cost is high). Therefore, in this situation, the publisher is
better off by offering the bundle along with the digital medium, wherein the traditional
consumers buy the bundle. At the margin, the gain from the large proportion of digital-savvy
consumers due to the higher digital price, and the gain from the increased demand from the
traditional consumers outweigh the loss due to the marginal cost of offering the bundle.
Therefore, when the mismatch cost is relatively large and the proportion of digital-savvy
consumers is large, the publisher’s optimal content-medium strategy is to offer a bundle as well
as the digital at the pricing scheme PI* even when the marginal cost is very high.
The optimal pricing schemes in the  - c p space are illustrated in Figure 3. Figure 3
(ii) illustrates the optimal pricing schemes when r is large. By comparing Figure 3 (i) and
Figure 3 (ii), we can see that as r increases, the region in the  - c p space in which the
publisher implements optimal pricing scheme PII* becomes smaller, and the region in which
26

she implements optimal pricing scheme PI* is larger. The reason is that when r is large, if the
publisher implements PII* or PIII* , then the loss from digital-savvy consumers is not only large
but also increases with  (because the digital price is lower and decreases as  increases).
Hence, the optimality of PII* becomes more restrictive and that region shrinks, and PIII* remains
optimal only when c p is large and  is not large.
Figure 3: Optimal pricing schemes in mismatch cost (  ) and marginal cost ( c p ) space,
  0.3 , (i): when the proportion of digital-savvy consumers ( r ) is small ( r  0.2 ), (ii):
when r is large ( r  0.7 ).
4. Comparative Statics and Numerical Extensions
In this section, we analyze the impact of changes in the marginal cost or in the proportion of
digital-savvy consumers, on the prices, publisher’s profit, consumer surplus and social welfare.
We also provide extensions via numerical analysis wherein we relax some of our model
assumptions.
4.1 The impact of the marginal cost on the optimal prices
PROPOSITION 3a: While the optimal price of the bundle always increases with the marginal
cost, the optimal price of the digital has a discrete decrease under some conditions.
Proposition 3a highlights the impact of the marginal cost on the digital price as well as
on the bundle price (Figure 4). Note that when the publisher changes the pricing scheme from
PI* to PII* , (i) the price of the bundle has a discrete increase though the rate of price increase
27

with the marginal cost remains the same, and (ii) the digital price has a discrete decrease and
remains constant with c p as before.
Figure 4: The optimal prices with the marginal cost of the bundle ( c p ):
  0.15, r  0.35,   0.55
This result is counter-intuitive because prior literature (Bakos and Brynjolfsson 1999,
Milgrom and Strulovici 2009) suggests that as the price of one good increases, the price of
another substitutable good also increases. In our context, the digital medium and the bundle
are partial substitutes (Kannan et al. 2009, Koukova et al. 2008), but an increase in the marginal
cost of the bundle leads the publisher to switch from PI* to PII* wherein the price of the bundle
increases but the price of the digital decreases. The intuition for this surprising result is as
follows. When the proportion of digital-savvy consumers is relatively small, if the marginal
cost of the bundle is sufficiently large, the publisher is better off by incentivizing some
traditional consumers to buy the digital instead of the bundle to save on the cost. However,
when the mismatch cost is large, the traditional consumers have a low WTP for the digital
medium and in order to incentivize them to buy the digital medium, the publisher increases the
bundle price, and at the same time, reduces the digital price (switch from PI* to PII* ). Here the
trade-off is such that the gain from saving on the cost and increasing the market coverage
outweighs the loss of the profit margin from consumers who buy the digital medium because
of the reduced digital price.
4.2. The impact of the proportion of digital-savvy consumers on the optimal prices and
the optimal market coverage
28

PROPOSITION 3b: As the proportion of digital-savvy consumers ( r ) increases, under some
conditions, while the price of the digital increases with r and then has a discrete increase and
remains constant, the price of the bundle also increases with r and then has a discrete drop
and remains constant.
Figure 5 illustrates that when r is small to moderate, the publisher adopts PII* , and
when r is relatively large, the publisher switches to PI* . When the publisher switches from
PII* to PI* , the price of the digital has a discrete increase and the price of the bundle has a
discrete decrease.
Figure 5: The optimal prices with the proportion of digital-savvy consumers ( r ):

{  0.1, cp  0.6,   0.55}
When r is small and the marginal cost is large, the publisher offers pricing scheme PII*
. Given the large marginal cost, the publisher is better off by incentivizing some traditional
consumers to buy the digital rather than the bundle (Profile 3, Figure 1 (ii)). Further, in pricing
scheme PII* , both the digital price and the bundle price increase with r . This is because as r
increases, the publisher is better off by increasing the digital price to gain a higher revenue
from digital-savvy consumers who buy the digital medium. Moreover, the relative
attractiveness of the bundle increases as the digital price increases, so the publisher increases
the bundle price to gain a higher revenue from traditional consumers who buy the bundle.
As r increases and becomes sufficiently large, i.e. at some threshold, the publisher is
better off by switching to the pricing scheme PI* from PII* . This implies that the publisher
29

charges an even higher digital price ( pId * , discrete increase) and at the same time reduces the
bundle price ( pIb* , discrete decrease). By charging a higher digital price, the publisher can gain
the higher profit margin from the digital-savvy consumers. However, since the digital price has
now become high, the bundle becomes more attractive not only to the traditional consumers,
but also to the digital-savvy consumers. Therefore, at the threshold, the publisher is better off
by reducing the bundle price, so that some high-valuation digital-savvy consumers switch to
buying the bundle, for which they have a higher WTP than for the digital medium. All
traditional consumers who purchase buy only the bundle. Therefore, by switching to PI* from
PII* , the publisher’s gain from both types of consumers increases, and the publisher is better
off. This finding suggests that as more consumers become digital-savvy, the publisher may be
better off by increasing the digital price and decreasing the bundle price, which implies that
the difference between the bundle price and the digital price may become smaller.
At the threshold value of r where the publisher switches from PII* (or PIII* ) to PI* , the
market coverage has a discrete decrease. This is because the digital price has a discrete increase
when publisher switches to PI* , and the increased digital price leads to a lower market coverage
for digital-savvy consumers. In addition, after the publisher switches to PI* , the traditional
consumers who purchase buy only the bundle, leading to lower market coverage for the
traditional consumers. After the threshold, the market coverage for the digital-savvy
consumers and the total market coverage increase continuously as the proportion of the digital-
savvy consumers ( r ) increases.
4.3. The impact of the proportion of digital-savvy consumers on the optimal profit,
consumer surplus, and social welfare
PROPOSITION 4a: The publisher’s optimal profit increases with the proportion of digital-
savvy consumers under all pricing schemes.
The publisher’s profit increases with the proportion of digital-savvy consumers in
pricing scheme PI* . This is because the total market coverage increases with r while profit
margins from the bundle ( pI  c p ) and digital ( pId * ) are independent of r . The profit gain
b*
from digital-savvy consumers outweighs the profit loss from traditional consumers, leading to
30

a higher profit. The publisher’s profit increases with r in pricing scheme PII* because 1) the
profit margin from both the bundle ( pII  c p ) and the digital ( pIId * ) increase with r since the
b*
bundle and digital prices increases with r and 2) the increase in market coverage from digital-
savvy consumers is greater than the decrease in market coverage from traditional consumers.
The publisher’s profit increases with r under the pricing scheme PIII* ; while the total market
coverage under pricing scheme PIII* is independent of r , the digital price increases with r ,
leading to the increase in profit margin from the digital.

PROPOSITION 4b: Consumer surplus increases with the proportion of digital-savvy
consumers when pricing scheme PI* is optimal, and first increases and then decreases with r
when pricing scheme PII* or PIII* is optimal. Social welfare can decrease with r under some
conditions.
One may expect that consumer surplus would monotonically increase with r under the
pricing scheme PII* or PIII* because both the digital price and the bundle price increase with r
and the total market coverage is independent of r . Surprisingly, we find consumer surplus first
increases and then decreases with r under the pricing scheme PII* or PIII* (Figure 6a). Figure
6a shows that the publisher’s optimal strategy is to offer both the bundle and the digital medium
and charge PII* under Scenario 1 (blue curve); and the publisher’s optimal strategy is to offer
only the digital medium and charge PIII* under Scenario 2 (green curve). Under either scenario,
we find that the consumer surplus first increases and then decreases as r increases. The
intuition for this surprising result is as follows. We know the digital-savvy consumers have
higher WTP for the digital medium than the traditional consumers, hence, given the same
digital price, the digital-savvy consumers’ surplus is higher than that of the traditional
consumers. As r increases, the market coverage for the digital-savvy consumers becomes
larger and the market coverage for the traditional consumers becomes smaller, though the total
market coverage remains constant (i.e. 1/ 2 ). Therefore, the total consumer surplus increases.
On the other hand, as the price of the digital increases with r , the surplus decreases for both
types of consumers who purchase the digital medium. When r is sufficiently large (beyond a
threshold), the surplus gain from the increased market coverage from the digital-savvy
31

consumers is less than the surplus loss from both types of consumers. Therefore, the total
consumer surplus decreases.
Figure 6: (a) consumer surplus ( CS * ) with r under different parameter scenarios; (b)
social welfare ( SW * ) with r under different parameter scenarios. Superscript of CS ,
SW refers to the scenarios. Subscript of CS , SW refers to the pricing schemes.
Scenario 1: {  0.1, cp  0.4,   0.35} ; Scenario 2: {  0.1, cp  0.7,   0.35} ;
Scenario 3: {  0.1, cp  0.7,   0.7} ; Scenario 4: {  0.1, cp  0.7,   0.55} .
Figure 6b shows that the social welfare increases with r when PII* or PIII* is optimal
in the feasible region of r ; and the social welfare has a discrete decrease when the publisher
switches from PII* to PI* or from PIII* to PI* in the feasible region of r . The intuition for a
discrete decrease in the social welfare is that when the publisher changes its optimal pricing
strategy from PII* (or from PIII* ) to PI* as r becomes sufficiently large, the market coverage
from both types of consumers has a discrete drop, and the total cost increases because more
consumers from both types of consumers buy the bundle. The decrease in market coverage and
the increase in cost lead to a discrete decrease in social welfare.
4.4. Continuous distribution of the mismatch cost parameter
In this section, we generalize our model by relaxing the assumption of the homogeneous
medium-mismatch cost parameter (  ) for all consumers to verify the robustness of our results.
When there is a continuous heterogeneity among consumers in their preferences over
the two mediums, a consumer has no mismatch cost (   0 ) when he receives the content in
his preferred medium, and has some mismatch cost (   0 ) when he receives the content in
his un-preferred medium.  is continuous and characterizes the degree of inconvenience
32

experienced by a consumer in accessing the content in his un-preferred medium. Because we
assume the two mediums are partial substitutes, we have   1 . A consumer who has a
mismatch cost  close to 1 incurs a very large degree of inconvenience, as opposed to a
consumer who has a  close to 0 who incurs very little inconvenience in accessing the content
in his un-preferred medium. In this generalized model, the analytical solution is intractable.
Therefore, we undertake the numerical approach to verify the robustness of our results.
Consistent with prior literature (Venkatesh and Chatterjee 2006), we assume that the
medium-mismatch cost parameter is uniformly distributed, i.e.  U [0.2, 0.7] 5. Under the
generalized model, the tradeoffs of the publisher in choosing the optimal content-medium
pricing strategies are the same as described in §2.2; following the similar logic, we get the
same possible optimal content-medium strategies, i.e., offering the bundle and the digital, or
offering the digital medium only.
Now we describe our numerical strategy. First, for each consumer type (digital-savvy,
or traditional), we generate 5151 synthetic consumers based on uniformly distributed points in
the two dimension space ( v and  ). A consumer i is represented by a duplet ( vi ,  i ). Then
we create 10,201 different scenarios wherein market parameters c p and r range from 0 to 1
with an increment of 0.01. For each scenario, we determine the optimal bundling strategy by
comparing the optimal profit from offering the bundle and the digital with that from offering
the digital medium only. We adopt a grid search procedure to search the optimal prices that
generate the maximum profit for each case of offering. Note that in the computation of profit,
we make sure the IC and IR constraints are satisfied. After getting the optimal prices, we
compute the optimal demand, consumer surplus, and social welfare for each scenario. Below,
we present the results of numerical analysis.
Result 1: The publisher’s optimal bundling strategies are consistent with those reported in §3.
Figure 7 presents the region plot of the optimal bundling strategies in the space of the marginal
cost and the proportion of digital-savvy consumers. We find that when the marginal cost is not
high, offering both the bundle and the digital medium is optimal; when the marginal cost is
high and the proportion of the digital-savvy consumers is relatively large, offering both the
5
We set the support for  from 0.2 to 0.7 to have better visualization of our results. We have checked that our results
hold for the support of  in any range from 0 to 1.
33

bundle and the digital medium is optimal; when the marginal cost is high and the proportion of
the digital-savvy consumers is relatively small, offering only the digital medium is optimal.
This result is similar to the result results reported in §3. Hence, under the generalized model
setup, our finding about the publisher’s optimal content-medium strategy remains valid.
Figure 7: Region plot for the optimal bundling strategies with marginal cost and the
proportion of digital-savvy consumers,   0.1
Result 2: The optimal price of the digital medium can have discrete decreases as the marginal
cost of the bundle increases (consistent with Proposition 3a). The optimal price of the bundle
can have discrete decreases as the proportion of digital-savvy consumers increases (consistent
with Proposition 3b).
We examine the impact of the marginal cost on the publisher’s optimal prices and the
impact of the proportion of digital-savvy consumers on the optimal prices. Figure 8a shows
that when the proportion of digital-savvy consumers is relatively small and the marginal cost
of the bundle is sufficiently large, while the bundle price has discrete increases, the price of the
digital incurs discrete decreases. This result is consistent with Proposition 3a and the intuition
is similar to that discussed in §4.1. The reason for the multiple discrete decreases is that in this
generalized model with a continuously heterogeneous mismatch cost, the publisher has
multiple optimal pricing schemes for different values of the marginal cost ( c p ). Hence, as c p
increases and reaches a threshold, the publisher switches from one optimal pricing scheme to
another optimal pricing scheme, which leads to a discrete drop in the digital price and a discrete
increase in the bundle price. Figure 8b shows that as the proportion of digital-savvy consumers
34

( r ) increases, the price of the digital may increase and the price of the bundle may decrease.
This result is consistent with Proposition 3b and the intuition is similar to that discussed in
§4.2.
Figure 8: Optimal prices with (a) the marginal cost, ; (b) the proportion of digital-savvy
consumers, c p  0.4,   0.1
Result 3: The consumer surplus can decrease as the proportion of digital-savvy consumers
increases, and social welfare may have a discrete decrease when the proportion of digital-
savvy consumers is sufficiently large. This result is consistent with Proposition 4b.
Figure 9 verifies that the consumer surplus and social welfare can decrease with r
under some conditions, when the proportion of digital-savvy consumers ( r ) is sufficiently
large. The multiple discrete decreases are due to the switching between multiple optimal
pricing schemes in the feasible regions of r wherein the digital price has discrete increases.
This leads to a decreased consumer surplus because of the lower market coverage and the lower
surplus for consumers who purchase the digital medium. The social welfare also incurs discrete
decreases because of the decreased consumer surplus when the publisher switches its pricing
schemes.
35

Figure 9: The optimal consumer surplus, social welfare with the proportion of digital-
savvy consumers, c p  0.8,   0.1
4.5. When the two mediums are perceived as complements
When the two mediums are complements, the valuation of the bundle is super-additive, i.e.
  1   . This implies that a consumer’s valuation of the bundle is higher than the sum of his
valuations of the content in the physical medium and in the digital medium.
When   1   , our Lemma 1A and Proposition 1 still hold. Specifically, offering the
bundle is a superior option to offering the physical medium, because the valuation of the bundle
is greater than the valuation of the physical medium, yet they incur the same marginal cost.
Offering the bundle as well as the digital medium dominates offering only the bundle. This is
because even in the case where the marginal cost of the bundle is small, offering the bundle
and the digital under the optimal pricing scheme PI* gives the publisher a higher profit,
compared to the case where the publisher offers only the bundle (refer to the proof for
Proposition 1 for the details wherein the condition     1 plays no role). When the marginal
cost of the bundle is large, the bundle becomes costly, and the publisher has more incentive to
offer the digital together with the bundle so that some low-valuation consumers who previously
do not purchase under the case where only the bundle is available now will buy the digital
medium. This leads to the higher total market coverage and the publisher is better off.
The above analysis implies that even when two mediums are complements, we have
only two content-medium strategies to choose from: (1) offering content in the bundle and in
the digital medium, and (2) offering content only in the digital medium. When the two mediums
are complements, i.e.     1 , and since by model setup, cp  (0,1) , we have cp     . We
36

know from the analysis in §3.2.1 and §3.2.2 that if cp     , then pricing scheme PIII* (offering
content only in the digital medium) is not optimal. Therefore, when the two mediums are
complements, there is no feasible region in which a publisher is better off by offering content
only in the digital medium. Hence, when the two mediums are complements, offering both the
bundle and the digital medium is optimal in the entire feasible region.
4.6. When consumers’ valuations for the two mediums are independent
In our conceptualization, we assume that consumers’ willingness to pay (WTP) for the content
in the physical medium and for that in the digital medium are correlated. This assumption is
consistent with prior literature (Venkatesh and Chatterjee 2006, Hsiao and Chen 2014, Tan and
Carrillo 2014), and reflects the nature of our context wherein the publisher offers the same
content in the two mediums. However, much of the bundling literature assumes that the
valuations of the two components or products are independent (McAfee et al. 1989, Armstrong
1999, Bakos and Brynjolfsson 1999, Nalebuff 2004). In order to compare our results with the
extant literature in bundling, we numerically explore (since the analytical solution is
intractable) the implication of a setting where consumers’ WTPs for the two mediums are
independent.
Let a consumer’s valuation for the content in the physical medium be v1 , where
v1 U [0, w1 ] , and his valuation for the content in the digital medium be v2 , where
v2 U [0, w2 ] . Without loss of generality, we assume w1  w2 . Furthermore, consumers’
valuation of the content in a bundle of mediums ( vb ) is sub-additive, i.e. vb  v1  v2 . We
assume vb   (v1  v2 ) , where  characterizes the degree of substitutability of the two
mediums, and   (0,1) . This is similar to the assumption of the partial substitutability in
Venkatesh and Kamakura (2003).

In some respects, this setup of the independent valuations for the content in the two
mediums is similar to the generalized setup in §4.4 where we assume that consumers’ mismatch
cost is uniformly distributed, though there is a key difference. The similarity is that when the
mismatch cost  is a draw from a uniform distribution, a consumer’s valuation for the content
in the physical medium v provides no information about his valuation for the content in the
digital medium, v(1   ) . Here in the setup of independent valuations, a consumer’s valuation
37

for the content in the physical medium v1 provides no information about his valuation for the
content in the digital medium, v2 . However, the key difference is that in the generalized setup
in §4.4, a consumer’s valuations are ordered. For example, for a traditional consumer, his
valuation for the physical medium is greater than that for the digital medium, that is v  v(1   )
for any draw of the mismatch cost parameter  . In the setup of the independent valuations, a
consumer’s valuations for the two mediums are not ordered. Hence, there are no consumer
segments. This also implies that there is no notion of mismatch cost parameter in this setup.
Under this setting, offering the content in the physical medium is dominated by offering
the content in the bundle and the logic is the same as described in §2.2; and offering the content
in the bundle only is weakly dominated by offering the content in the bundle and in the digital
medium. Now we verify if our optimal content-medium strategy results still hold under the
independent-valuation setup, i.e. whether offering only the digital medium or offering both the
bundle and the digital medium is optimal.
Figure 10: Region plot for the optimal strategies with the marginal cost ( c p ) and the
partial substitutability (  )
We adopt the numerical analysis similar to the one described in §4.4 by generating
synthetic consumers and creating a number of market scenarios from different values of the
marginal cost c p and the partial-substitutability factor  . For each scenario, we determine the
optimal content-medium strategy. The region plot in Figure 10 verifies that under some
parameter space the publisher’s optimal strategy is to offer the content in a bundle of mediums
38

as well as in the digital medium (partial mixed bundling); and under other parameter space, the
optimal strategy is to offer the content only in the digital medium (single component). Hence,
the numerical analysis indicates that our results in §3 are robust to the assumption of correlated
WTP for the content in the two mediums.
4.7. When the digital medium has a positive marginal cost or fixed cost
In our model setup, consistent with the literature in IS and economics, we assume that the
marginal cost of the digital medium is negligible and the fixed cost of the infrastructure for the
digital medium is sunk. But there may be situation in which the marginal cost of the digital
may not be negligible because of the cost of bandwidth, data storage and real-time updates.
Similarly, a publisher who offers content in the physical medium may be faced with the
decision to invest in the digital medium.
4.7.1. The positive marginal cost of the digital medium
In our main model, we assume the digital medium has zero marginal cost. This assumption is
consistent with prior literature in information systems (Varian 1995, Bakos and Brynjolfsson
1999, Chen and Png 2003, Sundararajan 2004a, Aron et al. 2006, Balasubramanian et al. 2015).
In this subsection, we relax the assumption of the zero marginal cost for the digital medium
and explore the scenario where the digital medium has a relatively small marginal cost,
compared to that of the physical medium. We provide the analytical analysis in Appendix B
and summarize the key results below.
When the marginal cost of the digital medium is relatively small, i.e. less than a
1
threshold 1    c p  (1    c p (1    r )) , we find that offering a
(1   )(1    r )
bundle of the two mediums dominates offering only the physical medium. Furthermore,
offering a bundle and the digital medium dominates offering only the bundle (see Appendix B
for the illustrative proof). The intuition is similar to that discussed for Proposition 1 in §2.2.
Figure 11 illustrates the upper bound on the ratio of the marginal cost of the digital to
that of the physical for which our results hold as the marginal cost of the physical medium
increases. Note that the market parameters for Figure 11 are such that the WTP for the physical
is close to that for the bundle (i.e.   0.1 ), the proportion of digital-savvy consumers is small
(i.e. r  0.1 ), and their WTP for the physical is close to that for the digital (i.e.   0.1 ). This
implies that under the market conditions such that the WTP for the bundle is close to that for
39

the physical and the digital medium has a positive marginal cost, the publisher is still better off
by offering the bundle rather than the physical medium. Furthermore, under such market
conditions as described in Figure 11, we can see that when the marginal cost of the digital
medium is less than 10% of the marginal cost of the physical medium, regardless of the
marginal cost of the physical medium, our results still hold. Specifically, when the marginal
cost of the physical medium is small (i.e. c p  0.2 ), the upper-bound ratio of the marginal cost
of the digital to that of the physical is relatively large (i.e. greater than 30%); when the marginal
cost of the physical medium is large (i.e. c p  0.8 ), the upper-bound ratio is relatively small,
but still greater than 10%. Therefore, our results in §3 are robust to the zero marginal cost of
the digital medium as long as it is relatively small compared to the marginal cost of the physical
medium.
Figure 11: The upper-bound ratio of the marginal cost of the digital to the marginal cost
of the physical as the marginal cost of physical ( c p ) increases (   0.1,   0.1, r  0.1 ).
4.7.2. Decision for investment in the infrastructure for the digital medium
Furthermore, our research has focused on the optimal content-medium pricing strategies and
the implications of key market parameters on the publisher, consumers and society given that
a monopolistic publisher has already made investments in infrastructure to distribute content
in the physical as well as in the digital medium (infrastructure investments are sunk). However,
in this subsection we study the digital medium investment decision of a publisher who has the
infrastructure for the physical distribution (fixed cost for the physical medium is sunk) but is
exploring the possibility of creating infrastructure for the digital medium. The publisher will
make the investment in the digital infrastructure only if the fixed cost of the digital medium is
40

less than the additional optimal profit that the publisher would earn by offering the content in
a digital medium only or in a bundle and the digital medium, than offering the content in the
physical medium only.
We provide the algebraic analysis in Appendix B to derive the conditions on the upper-
bound of the fixed cost of the digital medium wherein the publisher should invest in creating
the digital medium if the fixed cost is lower than the upper bound. For example, when the
publisher invests in creating the infrastructure for the digital medium and offers the content in
the digital medium and in a bundle of the two mediums at the pricing scheme PI* such that the
demand profile 1 emerges, we find that offering the content in a bundle and in the digital
medium generates higher profit for the publisher than offering the content only in the physical
1 r   1    r 1
medium. The difference in the two profits is: (1    c2p (  ) ) . If
4   2
1 1    r
the fixed cost of the digital infrastructure ( c f ) is lower than this threshold, then the publisher
should invest in creating the digital infrastructure and offer the content in both the standalone
digital medium and a bundle of the two mediums.
5. Discussion and Conclusion
The impact of digitization on publishers and consumers is an imperative question for content
industries in the digital era. Prior analytical studies on information goods pricing over dual-
medium access provide limited insights because they either have not abstracted the unique
characteristics in the content market and provided analytically tractable pricing solutions, or
they have not analyzed the impact of changes in key market characteristics on the publisher’s
prices and profit, on the consumer surplus and the social welfare. In this paper, we bridge this
gap in literature by building an analytical model with heterogeneous consumers’ valuations and
preferences, and an asymmetric cost structure for partially substitutable physical and digital
mediums. Our model lends itself to the closed-form analytical solutions for optimal pricing
schemes, and enables us to analyze the impact of changes in the market characteristics on the
publisher as well as on consumers.
We find that offering only the digital medium is optimal under some market conditions,
while offering a bundle of mediums and the digital medium is optimal under other market
41

conditions. Moreover, we find that offering the bundle and the digital is always superior to
offering only a bundle of mediums.
Our result of the optimal content-medium strategy is new in literature on content
pricing over dual mediums (Venkatesh and Chatterjee 2006, Simon and Kadiyali 2007), and
may explain the increasingly popular pricing strategy of offering a bundle and digital medium
or digital medium only in content industries (Yang 2012, Hiers 2014). This result contributes
to the bundling literature (Schmalensee 1984, McAfee et al. 1989, Venkatesh and Kamakura
2003, Armstrong 2013) by identifying conditions under which either partial mixed bundling or
a single component strategy is optimal.
Our results prescribe and provide the guidance for the publisher’s optimal content-
medium offering strategy. A good number of national and regional content providers adopted
various content-medium strategies in the late 1990s and in the early 21st century, but it appears
that many of them have now converged to the strategies that we recommend, i.e. offering both
the standalone digital and a bundle, or offering only the digital medium. For example, among
the top 10 newspapers in the United States (by 2017 circulation), nine of the ten, including
USA Today, The Wall Street Journal, The New York Times, and The Los Angeles Times, have
adopted the strategy of offering both the standalone digital medium and a bundle (Peters 2011,
Agility PR Solutions 2017). Only one of the top ten publishers, The Washington Post, offers
the content only in the digital medium (Mufson 2013).
Specifically, The New York Times offered content in a bundle and in the digital medium
in 2005. Two years later, it stopped offering the content in the standalone digital medium and
provided only the bundle option (Perez-Pena 2007). Then in 2011, it re-introduced the digital
medium along with the bundle (Peters 2011). Similarly, The Los Angeles Times previously
offered only a bundle of the print and the digital medium. In 2012 it began to offer the
standalone digital medium in addition to the bundle (Hirsch 2012). Also, The Wall Street
Journal had previously offered all three options: the digital medium, the print medium, and a
bundle of the two mediums (Kieshow 2011). A few years back it stopped offering the
standalone print medium and now offers both the standalone digital medium and a bundle.6
6
Most recently The Wall Street Journal offers the “print only” which actually includes the digital access to WSJ.com and
has a slightly lower price than the price for the print + digital option.
42

We observe not only that newspaper publishers’ strategies are converging to our
recommended content-medium strategies, but that many music publishers are also doing so.
The big 3 record labels (Sony BMG, Universal Music Group, Warner Music Group) and
hundreds of independent labels offer both standalone digital albums and bundles of a CD and
a digital album, through retailers like Amazon (Perez 2013).
Our optimal content-medium results suggest that the publishers should consider the
nature of the asymmetric marginal costs of the two mediums, the heterogeneity of consumers
in their preference for mediums, and the sub-additive valuation of the bundle in choosing an
appropriate pricing and bundling strategy. More specifically, if the marginal cost of the physical
medium is very large, then even if the proportion of consumers who prefer the digital medium
is relatively small, the publisher is better off by offering only the digital medium. On the other
hand, if the proportion of consumers who prefer the digital medium is relatively large in the
market, then even when the marginal cost of the physical medium is very large, the publisher
may be better off by offering the information goods in a bundle of mediums as well as in the
digital medium.
Our analysis of the optimal prices shows that while the price of the bundle increases
with the marginal cost, the price of the digital can decrease when the marginal cost is
sufficiently large. This surprising result is driven by the asymmetric marginal costs of offering
information goods in different mediums and consumers’ heterogeneous preferences over the
two mediums. We recommend that when the marginal cost of the physical medium increases,
the publisher should consider increasing the bundle price and at the same time reducing the
digital price. When the marginal cost of the physical medium becomes very large, the publisher
should consider shutting down the bundle and offering only the digital medium.
As the marginal cost of the physical medium has been increasing, and as increasingly
more consumers prefer the digital edition, newspaper publishers such as The Washington Post
and The Independent as well as the independent record labels such as Soulection and Triple
Pop have converged to the strategy of offering the digital medium only. National publisher The
Washington Post previously charged only for the print medium, but in 2013 started to charge
for the digital access and offer both the standalone digital medium and a bundle (Mufson 2013);
it has now adopted the digital-only strategy and stopped offering a physical medium (Stelter
2017). Another publisher, The Independent, stopped offering the print edition in 2016 and now
43

offers only the digital medium (Kottasova 2016). In the last five years, many regional or
industry-specific publishers, including The Seattle Post Intelligencer, The Ann Arbor News,
The Pittsburgh Tribune, and Lloyd’s List, have ceased to offer the print medium; they now offer
only the digital medium (Williams 2013, Purdy et al. 2017). These content-medium strategies
adopted by many publishers align with our recommendations about the optimal content-
medium strategies.
Furthermore, we find that when the proportion of digital-savvy consumers is
sufficiently large, while the optimal price of the digital can be higher, the optimal bundle price
can decrease. This finding suggests that as more consumers become digital-savvy, the publisher
may be better off by increasing the digital price and decreasing the bundle price, so the
difference between the bundle price and the digital price becomes smaller. Pricing practices
adopted by publishers such as The Wall Street Journal and The New York Times over the last
decade indicate that these publishers have been offering the standalone digital and the bundle
with the bundle price being higher by a smaller amount (Kieshow 2011, NY Times Subscription
2018, WSJ Subscription 2018). It is likely that other content publishers may also move towards
offering the content in a bundle and in the digital and charging only a slightly higher price for
the bundle than for the digital.
In addition, we find that under some market conditions, the total market coverage is
lower when the proportion of digital-savvy consumers is sufficiently large. This implies that as
more consumers prefer a digital medium, the price for the digital may increase, leading to a
decrease in the total market coverage. This surprising result has support from the changes in
the demand for content publishers since the advent of digitization. While Leggatt (2013) finds
an uneven impact on demand for different publishers due to digitization, prestigious publishers
like the Guardian and The Financial Times have seen their circulation drop by more than 30%
(Turvill 2014). This may suggest that the publisher should focus on the optimal content-
medium pricing strategy; though there may be a decrease in the market coverage as more
consumers become digital-savvy, the total profits may increase.
Our finding that offering the digital medium is always optimal for the publisher even
when most consumers are traditional consumers and the marginal cost of the physical medium
is low, informs the debate about the adoption of the digital medium in content industries (Seelye
2005, Harkaway 2012). We show that the publishers’ fear of the negative impact of the adoption
44

of digital technologies on their profits due to the cannibalization of physical medium sales is
rather untenable. Data from the American Press Institute shows that the percentage of
newspaper publishers that adopted digital subscription increased from 3% to 79% between
2001 and 2015 (Williams 2013).
Our analytical model allows us to study the impact of an increasingly larger proportion
of consumers adopting digital technologies, or the advent of the digital-native7 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. This result
informs the ongoing debate in the popular press which posits that digital consumption increases
social welfare (Azad et al. 2012). Further, this result has policy implications for regulatory
bodies like the FCC, because the prevalence of digitization may be driven by publishers’ profit-
enhancing initiatives and may hurt consumer surplus. This may call for design of an appropriate
policy framework that enhances publisher profits together with consumer surplus.
Our analytical framework has some limitations. We assume that the traditional and the
digital-savvy consumers have the same medium-mismatch cost parameter. It is possible that
consumers have heterogeneous mismatch costs due to their heterogeneous perceptions of
inconvenience for their un-preferred medium. When the mismatch cost is distributed across
consumers, our model becomes analytically intractable. However, through numerical analysis
we show that the publisher’s optimal offering strategy and other key results still hold.
For analytical tractability, we assume that all consumers have the same sub-additivity
parameter. It is likely that different consumers may have different sub-additive valuations for
the bundle. Although the model becomes analytically intractable, our optimal content-medium
strategy holds; i.e. offering either the digital medium only or both the bundle and the digital
medium is optimal. Another assumption we made in our model is that the valuation of the
bundle is sub-additive, which implies that the two mediums are partial substitutes. This
assumption is consistent with prior literature (Gentzkow 2007, Li 2015) and is appropriate in
our context, i.e. the same content is offered on both mediums. However, it is also conceivable
that under certain circumstances, as suggested by other literature (Kannan et al. 2009, Chen et
al. 2016), consumers may perceive the two mediums as independent or complements. When
7
The generation of people born during or after the rise of digital technologies (Degraff 2014).
45

the digital medium and the physical medium are perceived as independent or complements, the
parameter  is additive or super-additive. Under such a condition, the publisher’s optimal
strategy is to offer both the bundle and the digital medium, even when the marginal cost of the
bundle is very large. Offering only the digital medium may no longer be optimal.
Our model also assumes that consumers’ valuations for the two mediums are correlated.
This assumption is consistent with prior literature (Venkatesh and Chatterjee 2006, Hsiao and
Chen 2014, Tan and Carrillo 2014). Since our work is related to the literature on bundling, and
much of the bundling literature assumes the valuations of the two products are independent,
we considered the case when consumers perceive the content in the physical medium and the
content in the digital medium as two products, and consumers’ valuations for the two
“products” are independent. In this case, we find that our key bundling result still holds; i.e.
offering either the digital medium only or both the bundle and the digital medium is optimal
under different market conditions.
One limitation of our model is that we did not consider the fixed cost to create the
digital medium. When the marginal cost of the physical medium is small, the proportion of
digital-savvy consumers is relatively small in the market, and the mismatch cost is fairly large,
the digital medium is not attractive to traditional consumers who form the major proportion of
consumers in the market. This is because traditional consumers have lower WTP for the digital
medium. In this situation, since the net increase in optimal profits of the publisher by offering
the digital medium is not large, if there is a substantial fixed cost of creating the digital
distribution infrastructure, the publisher may be better off by not offering the content in the
digital medium or in a bundle of mediums and she may continue to offer content only in the
physical medium. On the other hand, if the marginal cost of the physical medium is high, the
proportion of digital-savvy consumers is large and the mismatch cost is relatively small, the
publisher may be better off by creating the digital distribution infrastructure, even if the fixed
cost is high. Note that the fixed cost of creating the digital medium may affect the publisher’s
decision to launch the digital medium; however, once the decision to launch the digital medium
has been made, the fixed cost of developing the digital medium does not play a role in the
publisher’s optimal pricing decisions.
46

We note that competition, online piracy, and other factors such as operational
management may also have an impact on the publisher’s optimal pricing strategies. Given the
scope of this paper, we focus on the monopoly case with no piracy concerns, and leave the
consideration of these other factors on content-medium strategies for future study.
Moreover, our work has several avenues for future extensions. First, when the content
is unknown to consumers, publishers may want to offer a free introductory period for
subscription or free samples of digitized content. It would be interesting to examine how the
introductory period or free samples signal the quality of content and how that affects a
publisher’s optimal pricing strategy over dual mediums. Second, in the current study we focus
on content pricing over two mediums, physical and digital. It would be interesting to see how
a publisher’s pricing strategy would change when the content is accessed via a physical
medium as well as in multi-digital mediums such as computer and mobile phone. Third, future
work can abstract a market wherein some proportion of the market does not have access to one
of the mediums; e.g. some fraction of seniors lack the necessary computer skills to consume
content online, or some geographical areas may not have Internet access. It might be interesting
to analyze how this market setting would affect a publisher’s pricing and bundling policy. In
addition, an important source of revenue for medium publishers is advertising. The advertising
revenue may vary greatly across mediums, which may in turn affect the publishers’ decisions
on content-medium pricing. Extending our model to include advertising may be a fruitful
avenue for future research.
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The Impact of Digitization On Content Markets Prices, Profit, and Social Welfare

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

Ran (Alan) Zhang*

* The order of authors is alphabetical, and they contributed equally.

Electronic copy available at: https://ssrn.com/abstract=3367395

Key words: Information goods pricing, partial-substitute medium, bundled mediums,

heterogeneous preference for mediums, content market

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Electronic copy available at: https://ssrn.com/abstract=3367395

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and 1  r proportion of consumers prefers the physical medium (traditional consumers)

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acceptance level parameter to capture consumers’ perceptions of digital goods relative to

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bundle of mediums is v   v  v(1   ) . This conceptualization is similar to the modeling

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consumers are traditional consumers),   1   and w1  1 .

2.2. The possible pricing strategies and market coverage profiles4

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Notation Definition Notation Definition

T Traditional consumers DS Digital-savvy consumers

pb Price of the bundle pd Price of the digital

pp Price of the physical  The sub-additivity parameter

 The mismatch parameter r Proportion of digital-savvy consumers

Marginal cost of physical

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 1     cp 1   d* 1 

Electronic copy available at: https://ssrn.com/abstract=3367395

PI* , PII* and PIII* respectively is optimal.

3.1. Optimal pricing schemes when  is larger than 1/ (1  r )

PROPOSITION 2a: If the mismatch parameter  is such that   1/ (1  r ) , then the

PIII* , even when the marginal cost is high.

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feasible parameter space which is divided by some technical thresholds of parameters  , c p

and r that are reported in Lemma 3A in Appendix B.

(r1, r2 ] PI* : bundle  digital PIII* : digital only

(r2 , 1) PI* : bundle  digital

Proposition 2b reports the publisher’s optimal content-medium offering strategy and

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    c p  1 and 0  r  r1 , or c p3  c p  1 and r1  r  r2 , the publisher offers the content

When the proportion of digital-savvy consumers is relatively small ( 0  r  r1 ) and

Interestingly, when the proportion of digital-savvy consumers is moderate ( r1  r  r2

consumers at a lower digital price ( PIIId * ).

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moderate ( c p  (c p1 ,   ] ) and the proportion of digital-savvy consumers is small ( r  r0 ),

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the bundle to economize on cost.

sub-additive parameter (  ) is large (    2 ), or (ii)  is relatively small (

  (0.333, 1.5  1.25) ), or (iii)  is small (   0.333 ) and  is relatively small (   3 ).

3.3. Optimal pricing schemes under feasible parameter regions

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Figure 2: Optimal pricing schemes in the proportion of digital-savvy consumers ( r ) and

Irrespective of the proportion of digital-savvy consumers ( r ), if the marginal cost is moderate

pricing scheme PIII* .