A Decision Support Framework for Optimal Pricing and Advertising of Digital Music as Durable Goods

Abstract

With the recent rising popularity of music streaming platforms, consumers are now able to enjoy music as a service, playing music for free without paying to obtain the ownership, the threat to the record labels’ financial prospect is eminent. We propose a novel decision support framework to assist the record label in making better informed decisions in the postrelease management timeframe to maximise the expected profit. By identifying the musical product as a durable goods, we model the consumers’ consumption rule with forward-looking behaviour, viewing music streaming as the consumers’ option of delayed consumption, making purchase only when the expected discounted lifetime utility exceeds the expected utility from streaming. Our proposed decision support framework has the record label use both the price and advertising as instrument of control in achieving maximised expected discounted profit, playing strategically in anticipating to the consumers’ decisions using an interactive Markov chain. We show in our illustrative example the proposed decision support framework is able to make decisions dynamically and performs substantially better than other single control variable decision tools.