Online Content Pricing: Purchase and Rental Markets

Digitization of content is changing how consumers and firms use purchase and rental markets. Low transaction costs make accessing content easier for consumers. Digital technology enables firms to create non-durable “rental” versions of their content and restrict content to the purchasing consumer, effectively shutting down resale markets. To empirically analyze the interaction of purchase and rental markets, I design a preference measurement tool to recover consumers’ inter-temporal preferences through currentperiod choices alone. I then use these preferences to solve for a dynamic equilibrium between consumers and the firm. In the context of the online home-video market, I find that when the firm is able to commit to holding prices fixed forever, providing content through the purchase market alone is sufficient. However, when the firm is unable to commit, it should serve both purchase and rental markets. Canonical theory models would predict exclusive rentals, but the purchase option enables indirect price discrimination in practice. I also find that when consumers place a premium on accessing new content, they are less likely to inter-temporally substitute, thereby increasing the firm’s pricing power. Consistent with theory, commitment to future prices increases profits considerably. This finding supports the rigid pricing structure of such retailers as Apple, despite studios’ push toward more pricing flexibility.