The accompanying spreadsheet depicts the pricing options (cells C10 and C18) for a best seller that is released in hardback and as an e-book. The demand curve for the hardback version is described by the equation: Q = 80 - 2.4P + 2PE, where PE denotes the e-book price. In turn, the demand curve for the e-book is given by: QE = 80 - 4PE. (Both quantities are denominated in thousands of units.) Note that lowering the e-book price by $1.00 increases e-book sales by 4 thousand units but also reduces hardbook sales by 2 thousand books. In short, each additional e-book sold replaces .5 hardback sales.
The profit cells are calculated based on the economic facts noted earlier in the chapter. (1) Revenues for the e-book are split 70-30 between book publisher and online seller. The marginal cost of producing and delivering additional e-books is essentially zero. (2) Revenues for the print book are split 50-50 between the book publisher and the book retailer. The publisher incurs $3.50 per hardback in production and related costs. (3) For both book types, the publisher pays a 15 percent author royalty based on total retail revenue.
a. Re-create the spreadsheet shown. If e-books did not exist (set PE = $20 so that QE is 0), what is the publisher's profit-maximizing hardback price?
b. Before 2010 when Amazon was free to set the e-book price, what price should Amazon have set? In response, what is the publisher's profit- maximizing price for the hardback?
c. Alternatively, if the publisher sets both book prices, what are the optimal prices? Why does the publisher prefer a higher e-book price than the online seller?
d. Suppose that each e-book sale replaces one hardback sale. This cannibalization rate is described by the hardback demand curve:
Q = 40 - 2.4P + 4PE. Using this demand curve, re-answer the questions in parts (b) and (c). Confirm that this worsens the pricing
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A
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B
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C
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D
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E
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F
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G
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H
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I
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1
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2
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Pricing Print Books and E-books
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3
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4
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5
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Book Publisher
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Q = 80 - 2.4P + 2Pe
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6
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7
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Print Books
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E-Books
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Total
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8
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Price
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Quantity
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Profit
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Profit
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Profit
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9
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10
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$25.00
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60.00
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$315
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$0
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$315
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11
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12
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Combined Profit
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13
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E Book Seller
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Qe = 80 - 4Pe
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$315
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14
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15
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E-Books
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16
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Price
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Quantity
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Revenue
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Profit
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17
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18
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$20.00
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0.00
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$0
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$0
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19
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conflict between publisher and online seller. In this case, which would the publisher prefer: (1) the time when e-books didn't exist, or (2) the young e-book market when Amazon set prices?