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
Date Written: December 12, 2016
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
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