Music industry in the era of online delivery: Application of Differential pricing and flat rate pricing for songs with varying consumer valuations

Online digital delivery allows the music companies to un-bundle their music albums and offer individual songs to the consumers. Consumers differ in their valuations of singles. A seller might now know the exact consumer valuations but there are resources available that would offer reliable information about consumer population. We develop a stylized model to investigate whether these song singles be offered at flat rate price or at differential price. Flat rate pricing, which is predominant in the online music industry, involves offering all songs at same price. Differential pricing involves pricing each song at consumers’ valuation for that song. We compare these pricing decisions for a profit maximizing monopolist. We show that the differential pricing fares at least as good as the flat rate pricing in every scenario. Moreover, for songs with different consumer valuation distributions, we show that the monopolist is able to extract greater consumer surplus if he offers songs at differential pricing. We further show that the additional profits by differential pricing over flat rate pricing increase as the relative difference between the mean valuations of songs under consideration increase. These additional profits decrease as the relative variance of the valuations of the songs under consideration increase.