Decision Sciences © 2015 Decision Sciences Institute Volume 47 Number 4 August 2016 The Agency Model for Digital Goods Yinliang Tan A.B. Freeman School of Business, Tulane University, New Orleans, LA 70118, e-mail:
[email protected] Janice E. Carrillo† Department of Information Systems and Operations Management, Warrington College of Business Administration, University of Florida, Gainesville, FL 32611-7169, e-mail:
[email protected]fl.edu Hsing Kenny Cheng Department of Information Systems and Operations Management, Warrington College of Business Administration, University of Florida, Gainesville, FL 32611-7169, e-mail: hkcheng@ufl.edu ABSTRACT While digital goods industries such as entertainment, software, and publishing are grow- ing at a rapid pace, traditional supply chain contract models have failed to evolve with the new digital economy. To illustrate, the agency model utilized by the e-book publishing industry has recently received much negative attention brought by the U.S. Department of Justice’s lawsuit against Apple, Inc. The emerging agency model in the e-book in- dustry works as follows: the publisher sets the price of the digital goods and the retailers who serve as agents retain a percentage of the revenue associated with a consumer pur- chase. The regulators claim that the agency model is hurting this industry as well as the consumer’s welfare because e-book prices have increased after the introduction of the agency model. We investigate the strategic impact of the agency model by examining a digital goods supply chain with one supplier and two competing retailers. In comparison to the benchmark wholesale model, we find that the agency model can coordinate the competing retailers by dividing the coordinated profits into a prenegotiated revenue sharing proportion.