Competition and Integration of Digital Content Distribution Channels

In this paper, we investigate the interactions between two digital content distribution channels: central server (CS) based and peer-to-peer (P2P) based. A central server based channel (such as iTunes) forms a network that displays negative externality, while P2P (such as Vuze) is a network with positive externality. When presented with the option of these two channels to obtain digital contents, users self select to join one channel based on its comparative utility. The equilibrium demands of both channels are derived when they are in a competition setting as well as in an integration setting. In a competition setting, the equilibrium demand of CS channel increases along with the increase of service capacity. It is also higher than that in the P2P channel. In an integration setting, it is observed that the equilibrium demand for CS based channel is much lower than that in a competition setting. This is actually induced by setting a higher price on the CS based channel. In other words, majority of demands are directed to P2P channel to better utilize its positive externality. At the same time, allowing only a small amount of demand in the CS based channel can also alleviate its negative externality. Finally, the gross utility in the integration setting is higher than that in the competition setting for both channels. These findings provide guidance on understanding the network externalities of digital content distribution channels. In order to fully utilize both channels, social policies and incentive mechanism need to be designed to align competition demand with the coordinated channel utilization.