Pricing of Digital Goods vs. Physical Goods

E-commerce is growing rapidly and sales of digital goods represent a substantial portion of all online sales. Several goods such as music and books are now available in a physical and digital format. In a single-period case we compare pricing of digital vs. physical goods and derive an optimal pricing strategy for digital goods in both a general setting without a capacity constraint and a capacity constrained setting. We show that the optimal price for digital goods is usually lower in comparison with physical goods. We also investigate the optimal pricing problem for digital goods under externality in a multi-period case. We demonstrate that the optimal prices are decreasing over time. A relationship between optimal prices in the singleand multi-period cases is established.