In addition to the traditional DVD rental channel, with the pervasive use of Internet, consumers can also watch motion pictures by purchasing videos on demand (VOD) from an on-line digital channel. However, both traditional and online channels suffer from piracy, which may decrease the overall real demand for such products. This study proposes a revenue-sharing mechanism in which the relationships among the film distributor, traditional DVD rental store, and Internet VOD service provider are investigated to avoid channel conflicts and achieve effective supply chain coordination. We assume that the services provided by the two channels are substitutable for consumers, and consider that both the diffusion effect and piracy rate are essential in order to forecast the demand for motion pictures. A game theoretic model is constructed to obtain the optimal revenue sharing ratio and the equilibrium retail prices for the two channels, with the aim of enhancing overall supply chain performance and profitability. The results show that when piracy is considered in the market, the market potentials of the two channels would decrease, and the price elasticity would increase, so the members of the supply chain in the film industry have to pay more attention to the impacts of cross elasticity, and be more prudent when determining their pricing strategies.
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