Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed?

Forthcoming, Production and Operations Management

59 Pages Posted: 13 Dec 2016 Last revised: 21 Mar 2021

See all articles by Shengli Li

Shengli Li

Peking University

Qiuyue Luo

Xi'an Jiaotong University (XJTU)

Liangfei Qiu

University of Florida - Warrington College of Business Administration

Shubho Bandyopadhyay

University of Florida - Warrington College of Business Administration

Date Written: December 12, 2016

Abstract

The development of Internet brought in revolutions in pricing models in the digital music industry. Currently, there are three common schemes to sell digital music: ownership, subscription and mixed pricing models. Our paper aims to explore and compare the three pricing models. Through a stylized model, we find that the advertisement revenue rate is a key factor that determines which pricing model is optimal. The music provider should choose the subscription model when the advertisement revenue rate is low; the mixed model when the advertisement revenue rate is moderate; the ownership model when the advertisement revenue rate is relatively high; and offer the music for free and exploit profit purely from advertisements when the advertisement revenue rate is very high. We further explored the impact of other factors including the intrinsic value provided by the music service and find that the subscription model is preferred in presence of high intrinsic value.

Keywords: digital music pricing models, subscription, ad-sponsored, business model

JEL Classification: C72, L11, M15

Suggested Citation

Li, Shengli and Luo, Qiuyue and Qiu, Liangfei and Bandyopadhyay, Subhajyoti, Optimal Pricing Model of Digital Music: Subscription, Ownership or Mixed? (December 12, 2016). Forthcoming, Production and Operations Management , Available at SSRN: https://ssrn.com/abstract=2884252 or http://dx.doi.org/10.2139/ssrn.2884252

Shengli Li (Contact Author)

Peking University ( email )

No. 5 Yiheyuan Road
Peking University
Beijing, Beijing 100871
China

Qiuyue Luo

Xi'an Jiaotong University (XJTU) ( email )

26 Xianning W Rd.
Xi'an Jiao Tong University
Xi'an, Shaanxi 710049
China

Liangfei Qiu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/qiuliangfei/

Subhajyoti Bandyopadhyay

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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