Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2015/32: Apple's Agency Model and the Role of Resale Price Maintenance

Øystein Foros (), Hans Jarle Kind () and Greg Shaffer ()
Additional contact information
Øystein Foros: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Hans Jarle Kind: Dept. of Economics, Norwegian School of Economics, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Greg Shaffer: Simon Business School, University of Rochester, Postal: University of Rochester , Simon Business School, 305 Schlegel Hall, Rochester, NY 14627, USA

Abstract: The agency model is a business format used by online digital platform providers (such as Apple and Google) in which retail pricing decisions are delegated to upstream content providers subject to a fixed revenue-sharing rule. In a non-cooperative setting with competition both upstream and downstream, we show that the agency model can lead to higher or lower retail prices depending on the firms' revenue-sharing splits and the relative substitution between goods and between platforms. Even if industry-wide adoption of the agency model would lead to higher profits for all firms, there may be equilibria in which it is not universally adopted. Most-favored-nation clauses (used by Apple in the controversial e-books case) can be used in such settings to increase retail prices and induce adoption.

Keywords: Resale price maintenance; interlocking relationships; revenue sharing

JEL-codes: L13; L41; L42

39 pages, November 27, 2015

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