piracyforsegmenti
se,dti cientitloshbetechnical isdenoteseiU= eeTx+eTx+eiM,andwithoutDRMrestric-M(where0< ≤1).Thecoef-SwabsenceofpartthedegreetowhichthesearchorDRM.of5
thepiratingeffortdecreasesintheMrRehOtDRMAsnotedinconvenienceearlier,thelegaltechnologicalbuyersandthusconstraintsreducethe
ofFoNyIna4
:ThewaitingtimeassociatedwithusingtheBitTorrentprotocolthngodecreaseswhenthereareagreaternumberofnodesbecausetheiroveralldownloadspeedincreases.
ydpet5
AslongasthereisatleastoneserviceontheInternetthatosCopprovidesaccesstopiratedmusic,eliminatingDRMprotectionmightnotdecreaseconsumers’costofpiratingbyasigni cantamount.Indeed,someindustryobserversarguethatconsumerswhotrulywanttodownloadmusicillegallyarenotaffectedbyDRMrestrictions.
baseuct.musicForutilityexample,thatconsumersDRMrestrictionscanderivecanfromlimittheusageprod-ofsotospeci cdevicesand/oroperatingsystems,contentconsumerspreferencesiftheirrisksystemlosingcrashesaccessortolegallypurchasedmusicpresenceinthechange.downloadableThus,consumers’theirabilitymusictoplayerenjoywithorabsenceofDRMformatrestrictions.isaffectedAsabytheandaDRM-freeproduct,consumersgetautilityresult,of ,utilitywithshowtion.inof aDRM-restrictedproduct,theygetalowerR= ,where ≥0.WesubsequentlyidealInterestingly,§5thatourwithoutDRMloweringsolution—itwhenresultsthebaseincreases arerobusttothisassump- =0,thenutilityforthethe rmhasthelegalcostofbuyers.stealing2.2.4.Consumers’Options.Insummary,con-sumers’fromeachoptionsforobtainingmusicandtheirutilitiesprice1.Buyptheoptionalbumareasinfollows:
thetraditionalformatat
T,andobtaintheutilityUTB
= utility2.BuyinUthet 1 x pT.RDB
downloadablealbumandobtainthe
x = thetheR tx pRDiftheproductisavailableinutilityDRM-restrictedUUDB
versionatpricep= tx pRD,orobtain
UDiftheproductisavailableand3.theStealDRM-freetheproduct(unrestricted)versionatpricepUD.theobtaintheutilityUinRDS
thedownloadableformat
= tx ei,i= H L DRMlegallyrestrictionsavailableorthedownloadableutilityUUDS
musiccomeswith
if= tx eiUlegallyiftheDRMrestrictions.
availabledownloadablemusiccomeswithout2.3.Firms
bel,aandistributionInternetretailer,channelandmadeatraditionalupofaasimonioussimpli cationConsideringdifferentiatedstructurewemakeonlyoneretailerofeachtypeisstillallowsfortractability,ustocapturebutthis(1)par-theandtype(2)thepositivecompetitionpro tbetweenmarginstheenjoyedtwoformatsallowofnetintraformatretailer.In§5,werelaxthisassumptionbyeachandtional(orretailerdownload)competition.asretailerretailerTas.TheretailerWereferrecordDandtotheInter-labelthesellstradi-an
Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM
MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS
5
whoisindifferentbetweenbuyingthetraditionalver-sionandtheDRM-restrictedversionisexactlythesameasxHintheHsegment.7ThelocationoftheLconsumerwhoisindifferentbetweenstealingadigitalversionandpurchasingaDRM-restrictedver-SB
sionisderivedbyequatingURD x =URD x ,whichyieldsxL= pRD eM+ /eT.BecauseweonlyhavetoconsidertheLsegment’smoralcost,wesimplify
L
ingback-wardinduction,we rstsolvetheretailers’andthentherecordlabel’soptimizationproblems,yieldingtheers.The lemaynotbeermissions@.
albuminthedownloadableformatthroughtheInter-netretailerandinthetraditionalformat(CD)throughthetraditionalretailer.
TherecordlabelownsthecopyrightandchooseswhetherornottosellthedownloadableversionwithorwithoutDRMrestrictions.Therecordlabelalsochoosesawholesalepriceforeachversionthatitsells:wTforthetraditionalversionandwDforthedown-loadableversion.Eachretailertakesthesewholesalepricesasgivenandchoosesitsretailprice.Althoughtherearetwosegmentsofconsumers(highandlowbpircotpiratingsbulabeleffort),neithertheretailersnortherecordycsiloingeffort.
canidentifyconsumers’locationsortheirpirat-optesilbh2.4.SequenceofEvents
taligThenvaiadstage,gamereamusictheisrecordplayedlabelinthreechoosesstages.theDuringformatstheof rstdgaethermsretailersformatsalbumitfordecidessaleandtosell.thewholesalepricestheforsnioconsumerssetproductmaximizetheirretailInthenextstage,theutilitypricesbysimultaneously.choosingFinally,ihtsciehuwqof,ygame.
subgame-perfectavailableintheNashmarket.equilibriumWeadopttheoptimaltothesolvenotionthennoaisrdnvee3.
seWeEquilibriumPricesandSales
censaandbeginvaedlrecordsalesourvolumeanalysisseparatelybyderivingequilibriumpricesAPDRM-restrictedlabelsellsfortwocases:(1)thene.ititheformats,thealbuminthetraditionalandsseloadablealbumand(2)therecordlabelsellslc’sritowhichformats.inthetraditionalandDRM-freedown-rAhturium.saihanalyzeComparingofthesetwoSubsequently,caseswouldinemerge§4,weinanalyzeequilib-teohpiracytheimpacttheseofDRMtwoprotectioncasesalsoonallowsthelevelustottdistributionandthechannel.pro tability6
ofvariousplayersintheoftghngiidryul3.1.SellingTraditionalFormatand
pconiDRM-RestrictedDownloads
cse,Indtilosrestrictedthiscase,hbeindownloadableretailerDsellsthealbumintheDRM-SwMrpiratingthetraditionalformat.formatIntheHandsegment,retailertheTsellscostitRehsumersOtFoerschooseishighbetweenenoughbuyingtopreventmusicpiracysothatcon-ofNyIning(seeFigure1).IntheLsegment,thefromcosttwoofretail-pirat-a:tbuyingislowhngocopyfrommusicenoughthefromsoInternet.twothatTheretailersconsumerslocationorstealingchoosebetweenoftheconsumer