32t 1 eT 3 1 2 32eMt2 2
2 eT 1 2 eM 9+ 2 3t 3 2· 8t2 2+eT 1 2 +2eTt 1 2+
1
· 8t +e 1 3+ 4eTeMt 1+ 1 3+
Whenwethecomparerecordlabel’spro tsinthetwocases,theresultinProposition2Bholdsaswell,butwithadifferentcutoffpoint, 1 ,whichisde nedinAppendixD.Itcanbeshownthatthiscutoffpointcanbenegative,whichmeansthattherecordlabel’spro tmayincreasewiththeeliminationofDRMevenwhendoingsodoesnotleadtoahigherutil-ityforconsumers(aresultequivalenttotheoneinProposition2A).Insummary,we ndthattheinsightsprovidedbyourmainmodelarerobustwhenweintroducedirectcompetitionbetweentraditionalfor-matandpirateddigitalversions.
6.
where = 1 and = 1 1 .
Sincemusic rstbegantobedownloadedontheInternet,therecordingindustryhasfrettedaboutthelong-termimplicationsofonlinepiracy.TheindustrypursuedDRMasapartialsolutionbecauseDRMrestrictionsmakecopyingharder;theydecreasepiracyandthat,inturn,improvesindus-trypro tability.Ontheotherhand,DRMrestrictionscanpotentiallyreducethevalueforlegalbuyersoftheproduct.Inthispaper,weshowthateventhoughDRM,piracy,andpro tsarealllinked,therelation-shipsamongthemarecomplex.TheconventionallineofthinkingmissestheimpactofDRMtechnologiesonthenatureofcompetitioninthelegalmusicmar-ket,whichinturnaffectstheconsumers’proclivitytosteal.Saiddifferently,becauseDRMdecisionsbythelabelaffectwholesaleprices,retailerincentives,retailprices,thelevelofcompetitioninthemarket,andtheincentivesofconsumerstosteal,theneteffectonpro tabilitydependsontheconditionsimposedbytheDRMtechnology—insomecases,itimprovespro tsforthelabel,andinothercases,itdecreasesthem.
Mostoftheexistingresearchhasfocusedonunder-standingthelinkbetweenpiracyand rmpro tabil-ity.NotonlydowelookatthelinkbetweenDRMand
Conclusion
12
Figure3
ImpactofRemovingDRMonRecordLabelPro ts
Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM
MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS
Copyright:INFORMSholdscopyrighttothisArticlesinAdvanceversion,whichismadeavailabletosubscribers.The lemaynotbepostedonanyotherwebsite,includingtheauthor’ssite.Pleasesendanyquestionsregardingthispolicytopermissions@.
SegmentH:Download retailer,pirated sources
Traditionalretailer
Download retailer,pirated sources
Traditionalretailer
piracy,butwealsoconsidertheimportantroleplayedbytheretailersandhowitaffectsupstreampro ts.Moreover,theextantliteraturelooksatthecompeti-tionbetweenpiratedsourcesversuslegalmusicsalesasawhole,whereaswemodelstrategicbehaviorofdownloadandtraditionalretailersastwodifferentsourcesoflegalmusic.Byanalyzingthecompetitionamongthetraditionalretailer,thedownloadretailer,andpiratedmusic,wegetabetterunderstandingofthecompetitiveforcesinthemarket.Asaresult,unliketheearlierliterature,weendogenizenotonlypiracyvolumebutalsoconsumers’choicesbetweentraditionalCDsanddigitaldownloads.
Incertaininstances,we ndthateliminatingDRMrestrictionscanleadtoanincreaseinsalesoflegaldownloads,adecreaseinsalesoftraditionalCDs,andadecreaseinpiracy.ThisisinstarkcontrasttotheviewthatremovingDRMwilluncondition-allyincreasethelevelofpiracy.ThisconclusionstemsfromtheideathatbyintroducingDRM-freemusic,
Table3
themusiclabelincreasesthedownstreamcompetitionbetweenthetraditionalformatandlegaldownloads.BecauseDRM-freemusicisastrongercompetitorfortraditionalCDs,itforcesthepricesofCDstomovedown,whichinturnlowersthelegaldownloadprice.Thiscompetitionbetweenthetraditionalanddown-loadformatslowerspricessuchthatsomeconsumersmovefromstealingmusictobuyinglegaldownloads.Thus,removingDRMcanlowerthelevelofpiracy.Furthermore,we ndthatthisresultcanoccurevenwhenconsumersdonotseeanydifferenceintheutil-itytheyderivefromDRM-freeandDRM-restrictedproducts.
Ouranalysisalsogeneratesseveraladditionalcoun-terintuitiveresults.ByremovingDRMandmakingillegalcopyingeasier,therecordlabelcanbene tfromtheintensi edcompetitionbetweenpiratedmusicandthedownloadretailer.Furthermore,thissuggeststhatDRMmayprotectthe“traditionalbusinesses,”thatis,retailersofCDs,morethantheyprotectthe
EquilibriumOutcomesUnderDirectCompetitionBetweenPiratedDigitalandLegalTraditionalFormats
Traditionalandunrestricteddownloadableversionsforsale
wUT= wUD=
2
2t eM2T 1 +eT eM 1 +t 2 + 2 3 +
T 1
Traditionalandrestricteddownloadableversionsforsale
wRT= wRD=
2
2t eM2T 1 +eT eM 1 +t 2 3 2 +
T 1
2t eM +e2T 1 +eT 1 2t+ eM
T 1
4t eM+wRD +e2T 1
T 1 3t+2wRDRTM 1+
2eMt +e2T 1 +eT 1 2t+eM
T 1
4t eMUD +e2T 1 +eT 1 3t+2wUDUTM
T 1 3+
2e2T 1 +2t eM 1+ +2t+wUD 1 +2wUT
T t 3 1 +4 + 1 wUD 1 +2 wUTM
pRD=
T 1 3+
pUD=
pRT=
2e2T 1 +2t eM 1+ +2t+ wRD+ 1 +2wRT
T 1 wRD 1 +2 wRTM +t 3 4 1+ + 2