The impact of product upgrading on the decision of entrance to a secondary market

Recently developed business models in the book publishing industry have led to the emergence of a self-publishing model in which authors publish their works directly through a dominant e-tailer like Amazon without recourse to traditional publishers. In this paper, we examine whether it is profitable for such an e-tailer to adopt this approach, what publishers should do, and whether it is wise for authors to embrace this self-publishing trend. Specifically, we model the publishing and retailing structure of the book industry to assess how different channel power and structures may affect chain members’ pricing and profits. Our analysis suggests that under certain conditions, it is wise for the publisher to cut off the supply to the dominant e-tailer, unwise for the author to choose the self-publishing model, and better for the dominant e-tailer not to implement a self-publishing mode. Using numerical analysis, we show that when the ratio of e-book buyers is high enough, even when the author’s revenue sharing rate does not change, the publisher may retain the author as a client by encouraging consumers to buy e-books. We also show that although the self-publishing mode greatly reduces consumer welfare, it may increase social welfare.