Sell E-Readers or E-Books? A Competitive Perspective

Motivated by observations of the e-book reader market, in this paper we consider the competition in a market composed of both integrated and unintegrated firms with vertically complementary and horizontally substitutable products. We augment the literature with an elaborate characterization of the customer decision-making process, as well as of the firm's detailed revenue structure. Using a stylized game-theoretical model, we show that the firm's strategic decisions - pricing and accessing - are closely associated with its customer characteristics. More specifically, in the pricing subgame, we find that the orders of access costs, equilibrium prices, and customer characteristics are all correlated, which is the case under both duopoly and oligopoly. This reveals strategic positions of different types of firms in the competitive market, and is of particular interest and practical value in terms of the strategic decision making for a firm