The Challenge of Revenue Sharing with Bundled Pricing: An Application to Music

Joel Waldfogel, University of Minnesota, and Ben Shiller, Brandeis University

B Shiller, J Waldfogel – Economic Inquiry, 2013; vol. 51, issue 2, pgs. 1155-1165

Abstract: Bundling can increase revenue and profits relative to selling products on a standalone basis, and this is an especially attractive strategy for zero-marginal-cost information products. Despite the clear benefits of bundling, it has one major problem: bundling produces revenue that is not readily attributable to particular pieces of intellectual property, creating a revenue division problem. The Shapley value provides a well-motivated solution to this problem, and we use unique survey data to create measures of bundle value and, in turn, to estimate Shapley values for each of 50 bundle elements. We then evaluate feasible revenue sharing schemes, including equal sharing, proportional sharing, and the modified Shapley value of Ginsburgh and Zang (2003, 2004). We first document that the Shapley value is highly incentive compatible (all bundle elements fare better inside the bundle than they do outside on a standalone basis). We then evaluate the feasible schemes according to both their incentive compatibility and their similarity with the Shapley value. We find, not surprisingly, that the feasible schemes are less incentive compatible than the Shapley value. Among the feasible schemes, equal sharing performs worst while the GZ scheme performs best and substantially better than proportional schemes in current practice.

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