Doubly-Bound Relationship Between Publisher and Retailer: The Curious Mix of Wholesale and Agency Models

Abstract

Since the time the industry for e-books transitioned from the wholesale to the agency model, several interesting observations have been made. For instance, despite its revenue-sharing approach that is supposed to be effective in addressing channel coordination issues present in wholesaling, the agency model has curiously led to higher prices and less demand in the e-book market. The main purpose of the current study is to provide insights into this curious market phenomenon by focusing on: (i) the substitutability between the printed- and e-book versions, and (ii) the interaction between the wholesale model (for printed books) and the agency model (for e-books). In this exploration, using a game-theoretic model, we discover that an increase in the agency fee that the retailer collects in the e-book market can depress the vitality of the market, which not only ends up hurting the publisher, but also the retailer. This is a telltale sign that retailers should perhaps be moderate in their effort to get a bigger cut in the agency arrangement. In addition, the complex interplay between the two parties across two retail channels is explained along with how it may lead to a counterintuitive equilibrium outcome. Some of the interesting observations from practice may, in fact, stem from a large agency fee in the e-book market. Reducing this fee can lead to a win-win outcome for both the publisher and the retailer.