The agency model for digital goods: Strategic analysis of dual channels in electronic publishing industry

The advent of digital goods has made a significant impact on the current traditional (physical) goods markets for items such as movies, music, video games, and books. Firms that manage both a traditional and a digital goods distribution channels are facing many emerging operational challenges. One of the most pivotal challenges is the supply chain contract model for the distribution of digital goods alongside their traditional counterparts. Recently, the agency model utilized by the e-book publishing industry has been highlighted in the press as a result of the U.S. Department of Justice´s lawsuit against Apple, Inc. The regulators claim that the agency model is hurting this industry as well as the consumer´s welfare because e-book prices have increased after the introduction of agency model. We investigate the strategic impact of the agency model by formulating a dual channel model in comparison with the prevalent wholesale model. Contrary to current press presaging the negative impact of the agency model, we find that the equilibrium price of digital goods is lower in the agency model than in the wholesale model. Furthermore, the agency model can mitigate the double marginalization effect of the supply chain and improve the consumers´ surplus.