DYNAMICS OF PRICE ELASTICITY OVER TIME: EVIDENCE FROM THE E-BOOK INDUSTRY. Eunkyoung LEE, KAIST Business School Byungtae LEE, KAIST Business School

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1 DYNAMICS OF PRICE ELASTICITY OVER TIME: EVIDENCE FROM THE E-BOOK INDUSTRY Eunkyoung LEE, KAIST Business School Byungtae LEE, KAIST Business School

2 1. INTRODUCTION Physical Books Sold Vs. Kindle Books Sold Kindle Books Sold Physical Books Sold Source: The Verge s live blog ( Eunkyoung Lee KAIST Business School 2

3 1. INTRODUCTION Differences between e-books and paper books Supply Side Marginal production cost Storage cost Distribution cost Piracy issues Cannibalizing Demand Side Initial cost - e-book reader device - e-book software and payment program Restriction on sharing contents A library in your hand No delivery time Eunkyoung Lee KAIST Business School 3

4 1. INTRODUCTION Price Elasticity, % % A direct indicator of consumers response to price changes Factors that affects price elasticity Demographic and competitor variables (Hoch et al. 1995) Consumers brand loyalty (Krishnamurthi and Raj 1991) Online and offline channel (Granados et al. 2012) Product life cycle (Simon 1979, Parker and Neelamegham 1997) There are few studies about digital goods price elasticity and its dynamics Eunkyoung Lee KAIST Business School 4

5 1. INTRODUCTION Research Questions Is the price elasticity of e-book demand changing over time? If so, what factors drive these changes? What are the other factors that influence e-book price elasticity of demand? What are the implications for pricing strategy of e-book or new digital products? Eunkyoung Lee KAIST Business School 5

6 2. DEVELOPMENT OF HYPOTHESES Research hypotheses (cont d) Dynamics H1. In the initial stage, e-book demand is becoming less price elastic over time. Reference Price Effect The price consumers have in mind. Differences between the reference price and the shelf price affect the demand and price elasticity (Fibich et al. 2005). Is an e-book a book? Is an e-book just a free file? According to the survey conducted in 2011 by Kyobobook, many consumers perceive an e-book not as a paper book but as a file that they can download for free through the Internet Eunkyoung Lee KAIST Business School 6

7 2. DEVELOPMENT OF HYPOTHESES Research hypotheses (cont d) Product properties H2-a. The demand for e-books with corresponding paper books is less price elastic than the demand for e-books that only exist in electronic form. The existence of a paper version would cause the reference price of an e- book to be high. Eunkyoung Lee KAIST Business School 7

8 2. DEVELOPMENT OF HYPOTHESES Research hypotheses (cont d) Product properties (cont d) H2-b. The demand for adult-only e-books is greater than the demand for e- books for all ages. The online adult industry is among the most profitable business branches on the Internet (Wondracek et al. 2010) H2-c. The demand for e-books belonging to the list of best books is greater than the demand for others. The quality of contents would apparently have a positive effect on the demand of e-books. Eunkyoung Lee KAIST Business School 8

9 2. DEVELOPMENT OF HYPOTHESES Research hypotheses (cont d) Consumers characteristics H3. The heavy user demand is less price elastic than the non-heavy user demand. Loyal consumers are less price sensitive than non-loyals in the choice decision (Krishnamurthi and Raj 1991) Eunkyoung Lee KAIST Business School 9

10 3. DATA KYOBOBOOK The largest book retailer in Korea E-book sales data from January 1, 2011 to December 15, 2012 Information on the e-book sold The date purchased, a customer number of the purchaser for each order General e-book data ISBN, title, list price, author, publisher, genre, whether it is for adults, whether is has a corresponding paper book, and whether it is one of best books or not Eunkyoung Lee KAIST Business School 10

11 4. EMPIRICAL METHODOLOGY AND RESULTS Key variables for H1 Type Variable Description Dependent Sales volume of the e-book i during the time t List price of the e-book i Number of months that has passed from the start of 2011 Independent _ _11 _12 Dummy variable for existence of the paper version of the book i Dummy variable for whether the e-book i is only for adults Dummy variable for whether the e-book i is one of the best e-boo ks in time t 1 Dummy variable for whether the e-book i, in itself or its correspo nding paper book, is one of the best books of 2011 Dummy variable for whether the e-book i, in itself or its correspo nding paper book, is one of the best books of 2012 Dummy variable for whether the e-book i, belongs to the genre j 0, 1,, 26 Eunkyoung Lee KAIST Business School 11

12 4. EMPIRICAL METHODOLOGY AND RESULTS Key variables for H3 Type Variable Description Dependent Sales volume of the e-book i List price of the e-book i Dummy variable for existence of the paper version of the e-book i Independent _11 _12 Dummy variable for whether the e-book i is only for adults Dummy variable for whether the e-book i is one of the best books of 2011 Dummy variable for whether the e-book i is one of the best books of 2012 Dummy variable for whether the e-book i belongs to the genre j 0, 1, 2,, 26 Eunkyoung Lee KAIST Business School 12

13 4. EMPIRICAL METHODOLOGY AND RESULTS The Log-Linear Demand Model for H1 (Model 1) e _ _11 _12 ln α ln ln ln ln ln ln ln _ ln _11 ln _12 The Log-Linear Demand Model for H3 (Model 2) ln α ln ln ln ln ln _11 ln _12 Eunkyoung Lee KAIST Business School 13

14 4. EMPIRICAL METHODOLOGY AND RESULTS Result for Model 1 All e-books E-books priced higher than 1,000 won Coefficient S.D. Coefficient S.D. lnprice *** *** TIME lnprice 0.003*** *** SUB lnprice 0.273*** *** lntime *** *** lnsub *** *** lnadult 1.352*** *** lnb_pm *** *** lnb_ *** *** lnb_ *** *** N=314,207,. N=309,077,. Eunkyoung Lee KAIST Business School 14

15 4. EMPIRICAL METHODOLOGY AND RESULTS Result for Model 2 For heavy users For non-heavy users All e-books E-books priced higher than 1,000 won All e-books E-books priced higher than 1,000 won Coefficient S.D. Coefficient S.D. Coefficient S.D. Coefficient S.D. lnprice *** ** *** *** SUB lnprice 0.260*** * *** *** lnsub *** ** *** *** lnadult 2.606*** *** *** *** lnb_ *** *** *** *** lnb_ *** *** *** *** N=38,542. N=37,920. N=49,364. N=48,540. Eunkyoung Lee KAIST Business School 15

16 5. CONCLUSION Main findings The demand of e-books is getting less price elastic as time goes on Limitations Consumers demographic factors were not used in this study We did not take into account the channel that consumers used for their purchases Contributions It contribute academically to understanding consumers perceptions of e-books and price sensitivity of demand. It would be practically useful for managers to establish pricing strategies in new digital product markets including e-books. Eunkyoung Lee KAIST Business School 16

17 THANK YOU Eunkyoung Lee KAIST Business School