bpircotthemusic.Below,wedetailourassumptionsaboutsbyuctheproduct,theconsumers,andthe rms.
silooptes2.1.Product
ilbhtTheproductweconsiderisanalbumofmusicthatalignconsumerscanobtainineitheroftwoformats:tradi-vaiadtional(i.e.,CDs)anddownloadable(e.g.,MP3orAACreadg les).BecauseCDsinthetraditionalformataresoldaerwithoutanyDRMrestrictions,weassumethatthemssncontentisDRM-free.However,musicthatissoldinioidownloadableformatcanbeeitherDRM-restrictedhtascieorDRM-free.Thus,DRMisanadditionalfeatureofhuwqthedownloadableproductthatcaneitherbeonoroff.,ynnWefollowthetimelineinthemusicindustryby rstoaisanalyzingthemarketwithDRM-restricteddownloadsrdnveeandthenmovingtoanalyzingDRM-freedownloads.secensa2.2.Consumers
vaedlWedevelopdemandfunctionsforvariousproductsAPbydevelopingamicromodelofconsumersandthenne.itianalyzingconsumers’optimalproductchoicesforassegivensetofprices.Thebaseutilityforamusicalbumlc’sritoisgivenby >0,whichre ectsthepurejoyoflisten-rAhtuingtothatparticularalbum.However,consumers’netsaihutilityisaffectedbytheirpreferencesforformat(tra-teohtditionalordownloadable),theircostofstealing,andttgtherestrictionsimposedbyDRM.Wedescribeeachhngiofthesenext.
idryulpcon2.2.1.Format.Someconsumersmayliketheicse,portabilityofthedownloadablemusic,whereasoth-dtilersmightlikethebookletandartworkortheabilitytooshbedisplayaCDasapartofmusiccollection.PreferencesSwMrbetweenthesetwoformatsaredistributeduniformlyRehonalinesegmentinthe 0 1 interval(HotellingOtFo1929),suchthatthedownloadableformatislocatedatNyIntheleftextremeandthetraditionalformatislocateda:tattherightextreme.Thetransportationcosttcap-hngoturesconsumers’disutilityofchoosingaformatthatirydisnottheiridealformat.
petosCop2.2.2.CostofStealing.Consumerscaneitherpurchasealegalcopy(traditionalordownload-able)orobtainanillegalcopyfromavarietyofsourcessuchaspeer-to-peernetworks(e.g.,eDonkey)
spendingetthesomeillegaltimecopyandofeffortin ndinganddownload-components:Weal.2007).
thealbum(e.g.,Hennig-Thuraumodelthetotalcostsofpiratingthroughthesumerstechnical/searchthemoral/psychologicalethicaltodifferintheircost,costse.cost,e,twoMandTofClearly,pirating;wee.g.,expectacon-adoesveryputernothighconsumerseecostoranovicecomputeruserwillhighlyhavepiracyofpirating,asstealingwhereasoraanconsumerexpertwhocaptureusersegmentsthiswillheterogeneity,haveamuchcom-welowerpiratingcost.Tothepiratinghigh(thatdifferintheirmoralmodelpiratingtwoconsumereffort.Inhavealowercost,H)segment,moraleH
andpiratinginconsumersthecost,lowfacee(ahighmoral
M,LL)segment,M<eH
they
M.Thereare sumers∈ 0 1 highinconsumersinsegmentHandH
(1 )con-choosesuchsegmentthatconsumersL.WeassumeineMissuf cientlysumerstoureinobtainsegmentHwillneversegmentpiratedmusic,whereassomecon-certain1).3ThisisconsistentLmaywithengageempiricalinpiracy(seeFig-lessfreeofwhetherconsumerstheyalwaysareavailablebuydigitalgoods, ndingsregard-thatbetweenResearchers(SmithandontheInternetforhaveTelangalso2008).
notedaofratepeer-to-peerexpertisenetworkswithdigital(Zentnertechnologypositivecorrelation2006).Toandusagecomponent,thiscorrelation,eweforassumetechnicallythatthesophisticated
technicalincorpo-T,islower2
BecauseCDsarenotDRM-restricted,musiccanberippedoffaCDanduploadedtoapiratedmusicwebsiteorapeer-to-peernetwork,oritcanbegiventoafriend.Thuspiratedmusiccanbedown-loadedevenwhendigitalmusicisnotlegallysoldorsoldonlyinDRM-restrictedformat.Forexample,inMay2002( veyearsbeforethe rstDRM-freedownloadablemusicalbumwassold)theInter-nationalFederationofthePhonographicIndustry(IFPI)estimatedthattherewere3millionsimultaneousglobalusersand500million lesavailableforcopyingatanygiventime(IFPI2002).
3
Moreformallystated,weassumethat
eLM< eT 3 eT+11t 1 3 eT+4t 1 1
and
eH3 e2
TM
>T 1 2 3e 1 2
T+4t 1 1
4
Figure1
EquilibriumDemandforLegalandIllegalVersions
Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM
MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS
ers.The lemaynotbeermissions@.
SegmentHDownload retailer,pirated sources
Traditionalretailer
Download retailer,pirated sources
Traditionalretailer
bpircotsbyconsumersucsiloforopteffortthewhoalsotendtohavestrongerpreferencesesilbhwhereofdownloadablei∈a consumerformat.Thus,thetotalpiratingH L ,isequallocatedtoeatpointxi=eTx+ei
onsegmenti,
M.
talig2.2.3.RestrictionsImposedbyDigitalRightsnvaiadManagement.ThecurrentstateofDRMtechnologiesreadgisaercopy,thatmssnrestrictortheyconvertworkbythecontrollingmusic le.howInthisusersmanner,canaccess,theyioiharderhowtheproductcanbeused,thusmakingithtscieHowever,topirateandincreasingthecostofstealing.huwqbuyersWewhothesehaverestrictionsnointentionsalsoinconveniencelegal,ynnoaisrdntwoWhenmodelanbothalbumthesehaseffectsofengaginginpiracy.DRMbelow.
restrictions,thereareveessiteswaysecensDRMorpeer-to-peerforittoshownetworks:uponthepiratedpiratesmusiccanbreakweb-avaethemdlAPaavailablerestrictionsonorthecopyInternet. lesfromTheamainCDoptionandmakeforne.toconsumeritissablesearcharoundwhoforwantsit.However,topiratewhenthealbumlegallywillavail-beelc’sruploadeddownloadablemusicisDRM-free,itcanalsobeitorAhpeople,directlytothepiratednetworksbymoretusaierthusincreasingthesupplyandmakingiteas-ihtethroughforconsumersohttgeststechnologiesto ndanddownloadpiratedmusictghnwhenthatgiidrDRMDRMthesuchasBitTorrent.4Thissug-restrictionstechnicalarecostofpiratingcandecreaseyulpcconsumersrestrictions,onictions,isethetotalcostremoved.ofSpeci cally,withi=i