Content and access provision in a discrete competition model

Abstract

The non-rival, non-excludable and infinitely expansible characteristics of digital goods with marginal cost of zero strongly favours the use of  bundling strategies. Theoretical tractability requires most models in the current literature to make highly stylised assumptions, rarely observed or  anticipated in the real-life situations, motivating inquiry. This paper considers a competition model in which:
• the firms, consumers and differentiated products are finite in number;
• prices are discrete and not continuous;
• consumers may purchase multiple items in a single product category where the degree of complementarity or substitutability of the product categories can also vary acrossconsumers;
• and where consumer-specific cost savings are obtained when purchasing multiple items from the same firm.
Approximate solutions are obtained through numerical simulation. Firms act in concert to maximise the total firm revenue. Our main finding is that  the interplay between maximal firm revenue, consumer surplus and prices is very complex and that high firm revenue and high consumer surplus  are not antithetic. It suggests also that consumer surplus and market concentration are not necessarily related. Many market outcomes that are  observed may be due to chance rather than design as diverse outcomes can accompany situations that are, to the firms, difficult to distinguish.