THE CHALLENGE OF REVENUE SHARING WITH BUNDLED PRICING: AN APPLICATION TO MUSIC

Authors

  • BENJAMIN SHILLER,

    1. Shiller: Assistant Professor, Department of Economics, Brandeis University, Waltham, MA 02453; NBER Post-Doctoral Fellow, Cambridge, MA 02138. Phone 617-588-1401, Fax 617-868-2742, E-mail shiller@brandeis.edu
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  • JOEL WALDFOGEL

    1. Waldfogel: Professor, Frederick R. Kappel Chair in Applied Economics, Carlson School of Management, University of Minnesota and NBER, Minneapolis, MN 55455. Phone 612-626-7128, Fax 612-626-1335, E-mail jwaldfog@umn.edu
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    • The authors thank the Mack Center at Wharton for financial support. We received helpful comments from participants at the WISE conference and in the BPUB 900 workshop at Wharton, and from anonymous referees. All errors are our own.


Abstract

Although bundling can substantially increase profits relative to standalone pricing, particularly for zero-marginal-cost information products, it has one major problem: bundling produces revenue that is not readily attributable to particular pieces of intellectual property, creating a revenue division problem. We evaluate several possible solutions using unique song valuation survey data. We find the Shapley value, a well-motivated theoretical solution, is universally incentive compatible (all bundle elements fare better inside the bundle than under standalone pricing), but revenue-sharing schemes feasible with readily available consumption data are not. Among feasible schemes, Ginsburgh and Zang's modified Shapley value performs best. (JEL C71, D79, L14)

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