Incentives for Strategic Vertical Alliances in Online Information Product Market

Abstract

The online information product market is characterized by the real-time network delivery of digital information products. In this market, the NP (Network Provider) interacts with the CP (Content Provider) in the way that the information product demand is significantly affected by the quality of network delivery. This paper considers a differentiated information product market, where two dominant CP and NP compete or collude on the short run (SR) price levels and on the long run (LR) quality investment and analyzes their market dynamics as a two-stage quality-price game. An intermediate level of vertical alliances, the LR alliance/SR competition, is analyzed to investigate the presence of an incentive to set a LR quality alliance while maintaining independent ownership. We show that the strategic vertical alliance incentives for the CP and the NP vary depending on their relative market power. By analyzing the effect of the advances in broadband access and compression technologies on the market dynamics, we also show that their vertical relations give different incentives for the development of new broadband information product markets. (C) 2000 Elsevier Science B.V. All rights reserved.