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THE CHALLENGE OF REVENUE SHARING WITH BUNDLED PRICING: AN APPLICATION TO MUSIC

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Although bundling can substantially increase profits relative to standalone pricing, particularly for zero‐marginal‐cost information products, it has one major problem: bundling produces revenue that is not readily attributable to particular pieces of intellectual property, creating a revenue division problem. We evaluate several possible solutions using unique song valuation survey data. We find the Shapley value, a well‐motivated theoretical solution, is universally incentive compatible (all bundle elements fare better inside the bundle than under standalone pricing), but revenue‐sharing schemes feasible with readily available consumption data are not. Among feasible schemes, Ginsburgh and Zang's modified Shapley value performs best. (JEL C71, D79, L14)
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Document Type: Research Article

Affiliations: 1: Assistant Professor, Department of Economics, Brandeis University, Waltham, MA 02453; NBER Post-Doctoral Fellow, Cambridge, MA 02138. Phone 617-588-1401, Fax: 617-868-2742 2: Professor, Frederick R. Kappel Chair in Applied Economics, Carlson School of Management, University of Minnesota and NBER, Minneapolis, MN 55455. Phone 612-626-7128, Fax: 612-626-1335

Publication date: April 1, 2013

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