Are e-books a different channel? Multichannel management of digital products

Abstract

Digital products are differentiated from online and offline physical products in important ways. This paper studies the influence of digital products on existing channels and the optimal multichannel management strategy in the context of the book industry. Using individual-level online transaction data and county-level offline bookstore data, I estimate a demand model of book format and retailer choices across genres. I use the estimates to solve for publishers’ optimal wholesale pricing strategy across channels. The demand-side estimates reveal that e-books and offline bookstores appear to compete head-to-head in book genres that serve casual reading purposes such as fiction, science fiction, humor, and biographies, which I categorize as “casual” books. The supply-side results suggest that as local bookstore availability increases, publishers should charge higher wholesale prices in the offline print channel, especially for “casual” books. I find that the e-book channel does not always hurt print channels but can serve as a strategic complement and enhance the pricing power of print channels in some markets and genres; this complementarity does not rely on branding or marketing communication and crucially depends on the relative strength of the channels. Specifically, a new channel can help an existing channel when two conditions hold: first, the new channel is not too weak and can generate enough market expansion effect; second, the existing channel is not too strong and can avoid too much cannibalization from the new channel. I use counterfactual analysis to illustrate the mechanism behind this result and how a multichannel management strategy should account for relative strength across channels.