Versioning information goods of multi‐channel publishers in two‐sided markets
| Pages | 785-804 |
| Published date | 07 August 2009 |
| DOI | https://doi.org/10.1108/14684520910985729 |
| Date | 07 August 2009 |
| Author | Eunjin Kim,Byungtae Lee,Jae‐Cheol Kim |
| Subject Matter | Information & knowledge management,Library & information science |
Versioning information goods of
multi-channel publishers in
two-sided markets
Eunjin Kim
Kyonggi University, Suwon, Korea, and
Byungtae Lee and Jae-Cheol Kim
Graduate School of Management of KAIST, Seoul, Korea
Abstract
Purpose – The purpose of this paper was to identif y whether the two-sided nature of markets in both
online and offline channels affects the versioning strategies of multi-channel publishers in the presence
of channel substitutability.
Design/methodology/approach – Using analytical models, the versioning of a multi-channel
publisher is analysed, with consideration of advertising revenue and possible channel substitutability.
Findings – The paper shows that not only the two-sided nature of the online market but also that of
the offline market affects the versioning strategy online. Multiple online versions are desired when the
offline advertising market shrinks and the online advertising market proliferates. In a reverse
situation, providing one online version (for free) can be optimal.
Originality/value – Previous studies on versioning have mostly considered only the information
market per se. However, studies on two-sided markets have shown that analysis that focuses on a
single side leads to analytical error due to inter-market network externalities. In this context, it is
proven that advertising revenue is a critical factor in the publisher’s decision whether to provide
multiple online versions.
Keywords Digital communication systems, Print media,Advertising, Income, Publishers
Paper type Research paper
Introduction
As the penetration of the internet progresses, there is an increasing awareness within
the traditional publishing community that besides their traditional offline channel, an
additional channel for content distribution is available online. Nowadays, most
traditional publishers provide their content both online and offline. For example, Th e
Wall Street Journal launched The Wall Street Journal Online in 1996 and The
Washington Post established a web site in 1996, while Britannica Online has been
available since 1994.
In providing information goods through both online and offline channels,
publishers such as newspapers and magazines often serve two closely linked markets
– advertisers an d readers (Rochet and Tirole, 2004). This is referred to as a two-sided
market in the economic literature since the willingness of advertisers to pay depends
on the size of the readership. Advertisers expect larger gains when the number of
readers is larger. In addition, the readers’ demand might be a function also of the
amount of advertising (Rochet and Tirole, 2004). This property is referred as
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Multi-channel
publishers
785
Refereed article received
9 July 2008
Approved for publication
9 March 2009
Online Information Review
Vol. 33 No. 4, 2009
pp. 785-804
qEmerald Group Publishing Limited
1468-4527
DOI 10.1108/14684520910985729
inter-market network externalities. Moreover, this feature is known to have strong
implications for pricing (Rochet and Tirole, 2004).
However, it has been widely ignored in the studies on versioning of information
goods. Versioning, which is also known as second-degree price discrimination, has
long been a practical and useful strategy for pricing and market segmentation by
publishers who serve heterogeneous consumers, and who know the aggregate
distribution of consumer valuations (Bhargava and Choudhary, 2001; Shapiro and
Varian, 1999). It has been recommended that firms and retailers of information good s
should use this strategy, especially in the digital economy. This is mainly because the
costs of producing different versions of information goods are almost zero, and this
strategy can reduce product comparison and help firms to meet the different value
perceptions of customers (Ancarani, 2002).
Given the growing importance of versioning, many researchers have analysed this
issue. However, in deriving versioning strategies, most previous studies have
considered only a single side of the market – the market for readers (Bhargava and
Choudhary, 2001). The two-sided nature of markets has been widely neglected in the
studies of versioning. Our study aimed to fill this void. The research question that we
addressed was whether the two-sided nature of markets in both online and offline
channels affects the versioning strategy of publishers.
Using analytical models, we analysed versioning of a multi-channel publisher, with
consideration of advertising revenue and possible channel substitutability, as prior
empirical studies indicated. Our results show that both online and offline advertising
revenues affect the quality and number of versions of information goods online. This
implies that not only the two-sidedness within the online channel but also that of the
offline channel affects the versioning strategy of multi-channel publishers online.
Literature review
Two-sided markets
“Two-sided markets” is the term used to refer to situations in which businesses cater to
two interdependent groups of customers (Rochet and Tirole, 2004). The two-sided
market shows that inter-market network externalities have crucial consequences for
pricing structure (Parker and Van Alstyne, 2005; Rochet and Tirole, 2004). In the
two-sided market, it has been shown that the market that contributes more to demand
for its complement is the market that should be subsidised (Parker and Van Alstyne,
2005; Rochet and Tirole, 2004). In case of the advertising and readers’ markets, the
readers’ market has been subsidised by advertising (Chaudhri, 1998; Kaiser, 2004).
This implies that publishers have generated most of their revenue from advertising by
attracting readers with low prices (sometimes even below-cost) (Chaudhri, 1998; Parker
and Van Alstyne, 2005; Rochet and Tirole, 2004). In the case of the print newspapers
and magazines, 78 per cent of the revenue has traditionally been generated from
advertising income (Eisenmann and Rust, 2000). Online advertising revenue is one of
the mostly widely discussed revenue streams for most providers of information goods
(Gallaugher et al., 2001). Moreover, online advertising is developing into a major
advertising outlet for millions of firms. In 2007, in the USA alone, firms spent $21.2
billion on online advertising, nearly a 26 per cent increase over the spending in 2006
(PricewaterhouseCoopers, 2008).
OIR
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786
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