The Impact of e-book Technology on Book Retailing

Transcription

1 The Impac of e-book Technology on Book Reailing Yabing Jiang Graduae School of Business Adminisraion Fordham Universiy Evangelos Kasamakas Graduae School of Business Adminisraion Fordham Universiy Absrac In 008, Amazon he dominan online book reailer unveiled Kindle, an e-book reader called by many observers he ipod of books as i is likely o ransform how people read books. E-book echnology offers a hird imporan channel for delivering books o consumers and possibly ransforming he book indusry. Two oher major channels of delivering books o consumers have been available so far: purchasing physical books from physical booksores, predominanly book-chains like Barnes-and-Noble, or purchasing physical books online, from online book reailers like Amazon. The main objecive of his aricle is o analyze how e-book echnology affecs sraegic ineracion in he book markes and ulimaely impac book sellers, publishers and consumers. Developing a sylized game-heoreic model based on produc differeniaion lieraure and informaion goods lieraure, we examine how enry of an e-book seller affecs compeiive ineracion in he book marke. Facors explored include he differeniaion of sellers in he physical book marke, consumers preferences for e-books, and ownership of he e-book seller. Implicaions for managing in he book indusry are discussed. 1. Inroducion In 008, Amazon he dominan online book reailer unveiled Kindle, an e-book reader called by many observers he ipod of books as i is likely o ransform how people read books. The Kindle device, which coss $99 (Augus 009), is only one componen of he e-book plaform provided by Amazon. Oher componens include an e-book sore providing he e-books and sofware ha encodes and proecs he books once downloaded ino he device. Amazon has a deal wih Sprin so cusomers can browse books and download he purchased books hrough Sprin s 3G nework. The original Kindle can hold up o 1,500 iles, i feaures screen echnology ha makes reading pleasan like reading paper, i includes dicionary, and i is lighweigh. The populariy of he original Kindle, moivaed Amazon o inroduce Kindle DX in May 009, a larger screen Kindle argeing he newspaper and exbook markes. Amazon also offers a sofware applicaion for iphone so people can coninue reading heir e-books using heir iphone for shor-periods of ime. Prices for Kindle e-books and newspaper subscripions are ypically cheaper han he paper versions. For insance, mos bes-sellers and new releases are $9.99, while he lis price of he paper book is ypically more han $0 (hp:// In addiion o Amazon s Kindle, Sony offers Reader, anoher popular e-book device, and is own e- book sore (hp://ebooksore.sony.com/). Barnes-and- Noble announced is own e-book sore and a parnership wih e-book device maker Plasic Logic in July 009 [6]. E-book echnology is likely o have a significan impac on he book markes. E-book echnology offers a hird imporan channel for delivering books o consumers. Two oher major channels of delivering books o consumers have been available so far: purchasing physical books from physical booksores, predominanly book-chains like Barnes-and-Noble, or purchasing physical books online, from online book reailers like Amazon. According o Publishers Weekly, book-chains and online sores hold 3.5% and 30% shares of consumer book purchases in 008 [14]. Compeiion beween online and physical sellers of producs has been analyzed in he e-commerce and relaed channel-compeiion lieraure [4, 19]. E-book plaforms offer a hird channel for book delivery o book readers, whereby a digial copy of a book (e-book) is delivered o a device used by he book-reader. E-book echnology alleviaes he need o produce, sore and disribue (e.g. shipping) physical books and ransforms he producion coss of book publishing. The American Associaion of Publishers esimaes ha e-book sales in he US reached $113 million in 008. This is sill a fracion of he $4.3 billion book marke, bu e-book sales grew 68.4% in 008, while oal book sales decreased.8% [1]. The inroducion of an e-book plaform selling a digial good compeing wih pre-exising sellers of /10 $ IEEE 1

2 physical goods is a novel phenomenon analyzed in his research projec as shown on Figure 1. The main focus is he sraegic ineracion in selling e-books and physical books in he book marke. Publishers Physical books Book reailer A Physical books Consumers Book reailer B (a) Physical book marke (a reailer can be online or physical reailer) Publishers Physical books Book reailer A Physical books Book reailer B Consumers e-books e-books (b) E-book plaform eners ino he book marke (sraegic ineracion of selling e-books and physical books) Transformaion of book marke due o e-book echnology E-book plaform E Figure 1: Overview of research framework. The main objecive of his projec is o analyze how e-book echnology affecs sraegic ineracion in he book marke. Developing a sylized game-heoreic model based on he produc differeniaion lieraure [11, 16] and he informaion goods lieraure, we examine how he enry of an e-book seller affecs compeiion of reailers selling physical books. Facors explored include he differeniaion of sellers in he physical book marke, consumers preferences for e- books, and ownership of he e-book seller. Our analysis provides sraegic insighs for managers in book and publishing indusry, bu i is also relevan, more generally, o managers of indusries ha undergo a digiizaion of heir informaion producs. Exending Salop s [16] uni circle modeling idea o sudy economic phenomena ha involve spaial differeniaion is a well-esablished approach in he IS economics lieraure. This approach was used for insance o sudy he effecs of search cos reducion in elecronic markeplaces [] and he analysis of masscusomizaion sraegies enabled by cusomer informaion on he Inerne [10]. We adop a similar uni circle modeling building-block o analyze he sraegic ineracion of digial and physical informaion goods sellers. Previous IS research on informaion and digial goods focused on issues of piracy and he value of digial righs managemen (DRM) echnology [9, 17, 18] and pricing issues like versioning [5] and bundling [3]. In addiion, he availabiliy of online book sales daa led o several empirical sudies, which show ha price dispersion does no disappear on he Inerne [7], social welfare increases subsanially due o increased produc variey a online reailers like Amazon [8], and only 16% of used-book sales cannibalize new book sales a Amazon leading o an increase of consumer and social welfare [1]. This lieraure has paid less aenion o he heoreical analysis of he sraegic ineracion beween digial and physical informaion goods. Our sudy adds especially o heoreical and empirical research on e-books by Oesreicher-Singer and Sundararajan [15]. They analyze he value of digial righs in he conex of a monopolis selling a physical and a digial book in he presence of piracy. They find ha he monopolis should resric cerain digial righs, because of he hrea of piracy, and ha his hrea affecs monopoly pricing. While our model seup and he objecive of our sudy is differen, our analysis conribues o heir call for more research on how digiizaion progressively ransforms informaiongoods indusries, as managers need o undersand and manage his ransformaion.. The model We consider a book marke in which consumers have uni demands for eiher a physical or an elecronic book. Consumers have a common reservaion value V for a given book ile, independen of is elecronic or physical forma. Consumers are heerogeneous along wo dimensions. The firs dimension capures consumer s preferences for physical books in a circular spaial marke as in Salop [16]. Cusomers are disribued uniformly on a circle of uni circumference. Two reailers A and B selling idenical physical producs (paper books) are locaed on he circle symmerically a equal disance apar. Cusomers who are no locaed a A or B incur a uni-disance disuiliy (misfi cos) when hey buy a physical book. Thus cusomers closer o A han B prefer A over B everyhing else being equal. The source of his heerogeneiy could be due o ransporaion coss, convenience of shopping, loyaly o one reailer over he oher, or oher ransacion coss. The second dimension of consumer heerogeneiy capures heir preference for e-books. Consumers differ in heir disuiliy (misfi cos) e of buying he e-book. This disuiliy may depend on inconveniences of reading elecronic ex and more generally he qualiy of e-book echnology, he need o purchase and learn an e-book device or insall and learn e-book sofware ec. We assume ha a cusomer s e-book disuiliy e can be wih probabiliy ρ and e wih probabiliy 1 ρ and < e. Furhermore, we assume ha V > 0 and V e < 0. Tha means ha cusomers of ype (low e-book disuiliy) will consider e-books in heir purchase decision and hey

3 may buy he e-book if i offers hem greaer surplus han he physical book. Cusomers wih ype e (high e- book disuiliy) do no like e-books in general and hey do no consider e-books in heir purchase decisions. These cusomers are no echnologically sophisicaed [15], or hey don like e-books for some oher reason [1]. When a firm E selling e-books eners he book marke, a consumer s disuiliy on e-book e does no depend on her locaion on he circle. This assumpion implies also ha here is no sysemaic difference in he e-book ype of cusomers who preferred A or B in he physical book marke segmen. This assumpion can be relaxed in fuure exensions. The physical book reailers incur a marginal producion and disribuion cos c, while he e-book seller has a marginal cos zero, as i is ypical in he informaion goods lieraure (e.g. [3]). Because he focus of he sudy is he sraegic ineracion beween sellers of physical and digial informaion goods, we do no disinguish online from physical sellers of physical books. So A or B can be online or physical reailers. We assume ha his poenial source of differeniaion of A and B is capured by heir locaion on he circle and he parameer. We hink his modeling assumpion is sufficien for he purpose of he paper, and suiable especially for markes in counries where e-commerce is maure enough, mos consumers have Inerne access, and consumers have well-formed preferences abou buying online or hrough physical sores (being closer o one or he oher in he language of our model)..1. Duopoly marke of physical book sellers Firs, consider he book marke when only he physical book sellers A and B are acive and e-books are no available. Because his is a symmeric marke, we only need o solve he model for reailer A. Le P A be he price charged by reailer A and c be he common marginal cos. The ne valuaion of a cusomer locaed a disance x apar from reailer A is given by V P A x. We focus on he marke-uncovered case, i.e., > (V c) such ha some cusomers are priced ou of he marke. This assumpion is parly driven by our ineres in examining he poenial of e-book echnology o expand he book marke. If he physical books marke was fully covered before he enry of e-book seller, hen one would no be able o examine wha facors may affec poenial expansion of book readership. Expanding book reading ime and book readership is probably one of he mos ineresing aspecs of e- books, since readers can buy a book insanly, hey can carry housands of iles wih hem, and hey can read a any ime possible hrough a muliude of devices. Now, le y be he cusomer who is indifferen beween purchasing he ile from A and no paricipaing in he marke. Since V P A y = 0, we know ha y = (V P A )/. Reailer A will choose he opimal price P A o maximize is ne profi, which is given by equaion (1): Π A = y(p A c) (1). Since he profi funcion is concave in price, solving he firs order condiion we have P A = (V + c)/ and y = (V c)/(). Tha is cusomers locaed wihin (V c)/() disance from reailer A or B will purchase he physical book, and cusomers locaed furher away from he reailers will no purchase any book. Lemma 1: When only he physical book reailers A and B are acive in he book marke, a equilibrium he prices, marke-shares, and profis are as follows in (1.1)-(1.3): P B =P A = V + c (1.1) S B =S A = V c (1.) Π B =Π A = ( V c ). (1.3) As expeced, prices are increasing in c, bu shares and profis are decreasing in c. Shares and profis are also decreasing in he misfi parameer, bu prices are independen of, because by our assumpions he marke is uncovered and boh reailers se prices like local monopoliss... Enry of an independen e-book seller Nex, consider he same physical book duopoly, bu wih a new e-book enran. Because of echnology improvemen and he developmen of Inerne and elecommunicaion neworks, books (and oher digial conen) can now be disribued and accessed hrough an elecronic reading device, which can simulae readers paper reading experience. An independen firm E sells e-books hrough an e-book plaform which may consis of a specialized reading device, a Digial Righs Managemen (DRM) echnology, and e-book sofware. In his case, boh reailers (A, B) offer paper books and he new enran (E) offers elecronic books. Each cusomer in he marke has a uni demand for a ile, eiher in paper or elecronic form. The e-book echnology may enhance some users reading experience. For example, i provides exra value-added feaures such as auomaic bookmark, dicionary, noe aking, search capabiliy, and ex-o- 3

4 voice funcion. The device can sore muliple iles so ha users can easily carry around a personal library wih hem in such a porable-size device. However, here are also downsides of using he device. The elecronic books are ofen proeced by a DRM echnology, which limis a book owner s capabiliy of sharing. For example, users of he elecronic device canno share (lend) he iles hey brough wih heir friends even hough hey all use he same ype of elecronic device. In addiion, some cusomers may prefer he experience of holding and reading a paper book. Mos imporanly, in order o consume an e- book, cusomers need o firs purchase he elecronic device sold by he new enran. Tha is a cusomer s ne valuaion for he e-book depends on he price of he e- book P e and he cusomer s disuiliy e, and he cusomer s locaion on he circle is irrelevan. Again, we illusrae he half-circle marke on A s side and we omi he subscrip A (or B) o simplify he noaion. As shown in Figure, his half-circle marke has wo segmens: y and ¼ - y where y = (V P)/. Firs, consider he ¼ - y segmen. Cusomers in his segmen will no purchase he paper book. However, cusomers wih a low disuiliy in his segmen may purchase he e-book. Since a cusomer s misfi cos e is independen of her locaion, he demand for e-book in he ¼ - y segmen is given by ρ(¼ y). Nex consider he y segmen. Suppose P e + > P for now. The marginal cusomer who prefers he paper book over he e-book is locaed a y p = (P e + P)/ since V P y p = V P e. Thus, he demand for he e-book in his segmen is given by ρ(y y p ). ¼ - y y Reailer A Figure : Illusraion of he half-circle marke on A s side. The profi funcions for he reailers and he independen e-book seller are characerized in equaions () and (3): Π A = Π B = (P c)[(v P)/ ρ(v P e )/] () Π e = 4ρP e [¼ (P e + P A )/]. (3) Reailers and he e-book seller will se he opimal prices o maximize heir profis. Here, we consider wo cases of he Sackelberg game, one in favor of he e- book seller, and he oher in favor of he paper-book reailers. y ¼ - y Case 1: The e-book seller anicipaes he move of physical book reailers In he firs case, he e-book seller ses is price, anicipaing he move of reailers. This case applies when he paper-book reailers do no foresee he enry of he new comer E, who secrely developed he elecronic device and worked hrough deals wih conen providers. I also applies when he paper-book reailers canno observe which iles will be available on firm E s elecronic device. The e-book seller has an advanage since i can deermine is price aking ino accoun he reailers pricing response. Lemma : When an e-book seller eners he marke anicipaing he response of physical book reailers, a equilibrium he prices and marke-shares are as follows in (4)-(7): 8V + 8c cρ ρ(10v 4 ) ( ) P B =P A = + ρ V (4) 16 8ρ (1 ρ)( V ) P e = + + c 8 4ρ (5) 8V 8c+ 6 cρ + ρ( ) ( ) S B =S A = V + ρ V (6) (8 4 ρ) S e = ρ(v + c Vρ ρ). (7) Case : The physical book reailers anicipae E s enry In he second case, he paper-book reailers have an advanage since hey can anicipae he enry of firm E and adjus heir prices before E ses is price. This special case enables he sudy of enry under adverse marke condiion for he enran firm. Lemma 3: When he physical book reailers anicipae E s marke enry, a equilibrium he prices and marke-shares are as follows in (8)-(11): P B =P A = 8 V + 8 c 4 cρ 8 ρv + ρ + 4 e 1 ρ (8) 16 8ρ (1 ρ)( V ) / 4 P e = + + c + ρ cρ ρ (9) 8 4ρ S B =S A = 8 V 8 c+ 4 cρ + ρ ( V ) 8 (10) ρ[(1 ρ)(8v + 4c+ 1 ) ] S e = + c+.(11) (8 4 ρ) 4

5 .3. Enry of an e-book seller owned by one of he wo physical book reailers Nex, consider he case in which A and E is an inegraed company. In oher words, reailer A, while compeing wih B in he paper book marke, also sars selling e-books. By developing an e-book plaform, including a specialized elecronic device and possibly DRM echnology, reailer A can provide some book iles in an elecronic forma. Cusomers who acquire he elecronic device from reailer A can hen purchase and consume e-books offered by A. Clearly, e-books direcly compee wih reailer A s paper-book offering, raising possible cannibalizaion concerns. However, reailer A may gain by aking marke share from reailer B and serving previously un-served cusomers. In his case, reailers may charge differen prices for he paper book. Following similar derivaion process, we can represen reailer A and B s profi funcions in equaions (1) and (13): Π A = (P A c)[(v P A )/ ρ(v P e )/] + ρp e D e (1) Π B = (P B c)[(v P B )/ ρ(v P e )/] (13), where D e = ½ (p e + P A )/ (P e + P B )/. We again focus on he Sackelberg game wih reailer A as he leader. Case 3: Reailer A ses is prices (P A and P e ) anicipaing he move of reailer B In his case, reailer A has an advanage since i anicipaes firm s B response o he e-book inroducion. Lemma 4: When reailer A owns he e-book seller E and i anicipaes reailer B s response o e-book inroducion, a equilibrium prices and marke-shares are as follows in (14)-(19): P A = 4 V + 4 c cρ + ρ 4 ρv (14) 8 6ρ 3(1 ρ)( V ) P e = + + c 8 6ρ (15) c(8 5 ρ) + ρ( ) 3 ( ) 8 P B = V + ρ V + V (16) 16 1ρ V c+ ρ( ) S A-paper = V (17) ρ S A-ebook = ( V + 3 c Vρ ρ ) (18) 8V 8c+ 7 cρ + ρ( ) 3 ( ) S B = V + ρ V. (19) (8 6 ρ) 3. Impac of e-book echnology on book marke The enry of he e-book seller has a significan impac on he paper-book reailers. When he independen e-book seller is he leader in he Sackelberg game (case 1), comparing wih he physical book duopoly case, he paper-book reailers charge a lower price in response o he enry of he independen e-book seller, i.e., P A = P B < (V + c)/. The marke shares of he paper-book reailers are also reduced. Thus, he paper-book sellers profis are lower as well. However, when he paper-book reailers are leaders in he Sackelberg game (case ), he price of paper book can be lower or higher han he price in he duopoly case depending on he parameer condiions. I is a lile surprise o see ha he enry of an independen e-book seller can someimes lead o a price increase for he paper books. This happens when consumers reservaion value is relaively low, i.e., V < + /4. In his case, he enry of e-book seller forces paper-book reailers o focus more on cusomers near he reailer s locaion only, or loyal cusomers. On he oher hand, when consumers reservaion value is relaively high wih V > + /4, he price of paper book is lower han he price in he duopoly case. Wheher he price of paper book is lower or higher han ha in he duopoly case, paper-book reailers marke shares are lower han ha in he duopoly case. Proposiion 1: When he physical book reailers anicipae he enry of an independen e-book seller, hen he physical book prices may increase compared o he physical book duopoly case. The condiion for ha o happen is V < + /4, i.e. he disuiliy are relaively large. Disribuion of disuiliy on e-books e 1 S A ρ=0. Se A 0 y 0 p y y y 0.5 p 0.5 Circular locaion Figure 3: An illusraion of marke shares for he half circular marke in case 1. Figure 3 represens he half circular marke in case 1, wih reailer A locaed a zero and reailer B locaed a 1/ (parameer values for his example: V = 6, c = 10, = 35, = 0, and ρ = 0.). Cusomers are uniformly disribued in he x-y space, wih he x-axis S B B 5

6 represening cusomer preference for he paper-book reailers (i.e., locaion on he circle) and he y-axis represening cusomer preference for he e-book. For example, cusomers below he line of ρ = 0. have a low disuiliy on e-books and will consider e-books in heir purchase decision. The verical doed line represens he cusomers who are indifferen beween purchasing he paper book and no buying in he physical book duopoly case (before e-book enry). The solid verical line y represens he new marginal cusomers when an independen e-book seller eners. In his case, he price of paper book is lower han ha in he duopoly case, so some cusomers who were previously priced ou of he marke are able o purchase he paper book when he independen e-book seller eners. The solid verical line y p represens he marginal cusomers who are indifferen beween he paper and e-book. So cusomers locaed in [y p, y] and wih ype will now purchase he e-book insead of purchasing from A. Similar siuaion applies o reailer B. Thus, when he independen e-book seller eners and as he leader in he Sackelberg game he paper-book reailers gain some new cusomers by lowering heir prices, bu hey also lose some cusomers o he e-book sellers. Also he e-book seller expands he oal book consumpion, because some ype cusomers, who did no paricipae before E s enry, now purchase an e-book Coss and differeniaion The hree scenarios wih an independen e-book seller and an inegraed e-book seller share some common properies. The paper-book reailers will increase prices when he marginal cos of paper book increases. In response, he e-book seller will also increase he price of e-books ( Pj / c > 0, j = A, B, e). When consumers uni disuiliy on paper book increases, paper books become less aracive o consumers. However, because reailers are insulaed from direc compeiion, he price of paper book acually increases ( P i / > 0 (i = A, B)). In response, he e-book seller will also increase he price of e-books ( P e / > 0). As a resul, boh he marke shares of paper books and e-books decrease in, ( S j / < 0 (j = A, B, e)). When consumers disuiliy on e-book increases, e-books become less aracive o consumers. To compee wih paper-book reailers, e-book seller will reduce he price on e-book. In response, he paperbook reailers, however, will increase he price on paper book. Ineresingly, even hough he e-book seller reduces is price and he paper-book reailers increase heir prices, he marke share of e-book decreases and he marke share of paper book increases ( P i / 0 (i = A, B), P e / < 0, and S / > 0 (i = A, B), S / 1 < 0 ). i 3.. Disribuion of consumers e-book preferences e I is also ineresing o noe ha he change in ρ, he fracion of cusomers wih ype, has differen impac on prices depending on parameer values or who is he leader in he Sackelberg game. An increase in ρ means more cusomers have a low disuiliy ( ) on e-books, and his is in favor of he e-book seller. When he independen e-book seller is he leader, is price and marke share are boh increasing in ρ. However, when he paper-book reailers are he leaders, he price of e-book can increase or decrease in ρ depending on parameer values. In paricular, when consumers reservaion value is relaively low, i.e., V < + /4, we have P i / ρ > 0 (i = A, B) and P e / ρ > 0. While more cusomers having a lower disuiliy on e-books should inensify he compeiion beween paper and e-book sellers, wih he paper-book reailers focus more on loyal cusomers (recall ha P A = P B > (V + c)/ in his case), he price compeiion is acually relaxed. As he e-book seller increases is price when ρ increases, he paper-book reailers marke shares are acually increasing in ρ, i.e., S i / ρ > 0 (i = A, B). Therefore, he paper-book reailers can benefi when more cusomers have a lower disuiliy on e- books. Bu when V > + /4, as more cusomers have a lower disuiliy on e-books he price compeiion is inensified, i.e., P i / ρ < 0 (i = A, B) and P e / ρ < 0. Sill, he paper-book reailers marke shares are increasing in ρ. Proposiion : When reailers anicipae E s enry, hen all shares are increasing in ρ. However, all prices are increasing in ρ if V < + /4, and all prices are decreasing in ρ if V > + / Ownership of e-book plaform When reailer A also offers e-books and acs as he leader in he Sackelberg game, i will charge a higher price han ha in he duopoly case, bu in response reailer B will charge a lower price han before, i.e., P A > (V + c)/ > P B. This suggess ha he inroducion of Kindle by Amazon creaes a price pressure o Barnes and Noble selling only physical books, which explains e 6

7 he ineres of Barnes and Noble o move ino he e- book marke segmen. Similar o he independen e-book cases, B s price is increasing in and he price of he e-book is decreasing in. Bu now A s price of paper book is independen of he disuiliy parameer. Again in he conex of Kindle, his means ha he perceived qualiy (inverse of disuiliy) of Kindle in he eyes of cusomers considering e-books (ype ) does no affec Amazon s physical book prices. The shares of paper books are increasing in and he share of e-book is decreasing in (as in he independen e-book seller case). Ineresingly, he oal marke share of A is decreasing in. This happens because, as increases, he increased share in physical books is no big enough o offse he decreased share in e-books. Conversely, if Amazon s cusomers perceive an improvemen of Kindle s qualiy (lower ), Amazon s oal share will increase, because he Kindle share will increase more han he reducion of Amazon s physical book share. Thus, as decreases, he marke-expansion effec of e-books offses he cannibalizaion effec, and ha benefis a company like Amazon ha inroduces he e-book plaform. While does no affec A s physical book price, he fracion ρ of cusomers considering e-books does affec A s physical and e-book prices. When ha fracion of cusomers increases, we have PA / ρ > 0, Pe / ρ > 0, S A paper / ρ < 0, and S e / ρ > 0. Tha is, when ρ increases, he inegraed reailer A will focus more on he loyal cusomers (cusomers close o A s locaion) in he paper book marke and increase is price on e-books. Again, in his case even hough he e- book s price is increasing in ρ, he marke share of he e-book also increases in ρ. As ρ increases he oal marke share of A may increase or decrease. This means ha he cannibalizaion effec may offse he marke expansion effec of e-books for A. The effec of ρ on B s physical book price and marke-share may also be posiive or negaive. Proposiion 3: When reailer A owns he e-book plaform, hen A s oal marke-share is decreasing in, bu i can be increasing or decreasing in ρ. B s share and price can also be increasing or decreasing in ρ. A s prices (physical and e-book) are increasing in ρ. This analysis suggess ha invesmen in an e- book plaform ha allows a book seller like Amazon o sell e-books o cusomers is an imporan sraegic facor in he compeiive ineracion in he book marke and i will be explored furher in our sudy. 4. Discussion The Inerne and IT advances enable digiizaion of books, ransforming he compeiive forces in he book indusry. This aricle developed a sylized gameheoreic model ha capures he effecs of e-book enry on book markes. Our analysis showed ha e- book enry leads o inricae price adjusmens, and share and profi changes. E-book echnology offers he poenial of marke expansion, which can be quanified in our research model. In order o manage he enry of e-book echnology (e.g. Amazon) or he response o ha enry, managers need o consider several facors including he differeniaion and inensiy of compeiion in he pre-exising physical book marke, he cos difference beween e-books and physical books, he compeiive leadership, he fracion of cusomers considering e-books in heir purchase decisions, and he perceived qualiy of e-books for hose cusomers ha consider e-books as an opion. In high-velociy informaion-goods markes, some of hese facors may change fas, so opimal decisions under he curren marke condiions may need o be adjused in he near fuure. Research and indusry daa [1, 13, 15] sugges ha he book indusry is in is early sages of ransformaion due o IT and e-book echnology. In our model his implies ha here is a small bu increasing fracion of consumers ha consider e-books in heir purchase decisions (ρ is low and increasing). We can also conjecure ha he qualiy of e-book echnology is low, bu i is improving, so is high and decreasing. Given hese condiions, our analysis in secion 3. has shown for example ha prices will change in a nonlinear way in he fuure. This is shown qualiaively on Figure 4, where he dashed-arrow represens he expeced direcion of change of marke parameers. ρ P j < 0 ρ V-/4 j = ABe,, P j > 0 ρ Figure 4: As marke shifs o lower and ρ increases (dashed-arrow), prices in he book marke will change in a non-linear way. 7

8 In he nex seps we will complee he analysis of he curren model examining addiional cases, for example he covered physical book marke case, and compeiion of e-book sellers. Transi In exensions of he curren model, we will furher analyze in deail he impac of elecronic disribuion of digial conen (e-books) on consumers, inermediaries, and publishers. As leading ech companies like Amazon and Google, are maneuvering sraegically for he conrol of he growing e-book marke segmen, power changes in he book indusry s value-chain are possible. Anecdoal evidence suggess ha publishers are increasingly concerned abou he increasing conrol of e-books by Amazon s Kindle plaform. We will examine inermediary or plaform compeiion, which includes he sraegic behavior of publishers and heir incenives o offer e-book versions of heir iles. Exploring hese direcions is necessary in order o shed more ligh on he ransformaional power of e-books and IT. References [1] American Publishers Associaion, Indusry Saisics, Published on March 31, 009, available a: Sas.hm [] Bakos, Y. "Reducing buyer search coss: implicaions for elecronic markeplaces", Managemen Science (43:1), 1997, pp [3] Bakos, Y. and Brynjolfsson, E. Bundling and compeiion on he Inerne, Markeing Science (19:1), 000, pp [4] Balasubramanian, S. "Mail versus mall: A sraegic analysis of compeiion beween direc markeers and convenional reailers", Markeing Science (17:3), 1998, pp [5] Bhargava, H.K., and Choudhary, V. "When is versioning opimal for informaion goods?", Managemen Science (54:5), 008, pp [6] Birchall, J. Barnes & Noble launches online Kindle challenge, Financial Times, July 1 009, available a: [7] Brynjolfsson, E., and M. Smih. Fricionless commerce? A comparison of Inerne and convenional reailers, Managemen Science 46, 000, pp [8] Brynjolfsson, E., Y. Hu, and M. Smih. Consumer surplus in he digial economy: Esimaing he value of increased produc variey, Managemen Science 49(11), 003, pp [9] Chellappa, R.K., and Shivendu, S. "Managing piracy: Pricing and sampling sraegies for digial experience goods in verically segmened markes", Informaion Sysems Research (16:4), 005, pp [10] Dewan, R., Bing, J., and Seidmann, A. "Produc cusomizaion and price compeiion on he Inerne", Managemen Science (49:8), 003, pp [11] Economides, N. "Symmeric equilibrium exisence and opimaliy in differeniaed produc markes", Journal of Economic Theory (47), 1989, pp [1] Ghose A, Smih M. and Telang R. Inerne exchanges for used books: An empirical analysis of produc cannibalizaion and welfare impac, Informaion Sysems Research (17:1), 006, pp [13] Greco, A. The Book Publishing Indusry. Lawrence Erlbaum Associaes, Mahwah, NJ, 005. [14] Millio, J. "E-ailers' Marke Share Grows", Publishers Weekly (55:13), 008, pp [15] Oesreicher-Singer, G., and Sundararajan, A. "Are digial righs valuable? Theory and evidence from ebook pricing", NYU CeDER-06-01, 006. [16] Salop, S.C. "Monopolisic compeiion wih ouside goods", Bell Journal of Economics (10) 1979, pp [17] Smih, M.D., and Telang, R. "Compeing wih free: The impac of movie broadcass on DVD sales and Inerne piracy", MIS Quarerly (33:) 009, pp [18] Sundararajan, A. Managing digial piracy: Pricing and proecion, Informaion Sysems Research (15), 004, pp [19] Viswanahan, S. "Compeing across echnologydiffereniaed channels: The impac of nework exernaliies and swiching coss", Managemen Science (51:3), 005, pp