adigitalirydpetos6
CopAsweshowinAppendixA,itisoptimalfortherecordlabeltointroducesomeformofdigitaldownloads.Inotherwords,ifthelabelonlysellsCDsthroughatraditionalretailer,thenitisoptimalforthelabelalsotosellthrougharetailerthatonlysellsdigitaldownloads.
optimalretailandwholesaleprices:
p 3e2T 1 3eMt 5eMRT
T +2 1 2=2 1 3e
T3e2
3e+8t 1
p M eMRD=
TT 1 3e +12t 1 2
2 1
Te+8t 1
w TRT=2 1M 1
w eT1
RD=
M
Equilibriumpro ts,prices,demand,andpiracyvol-umearesummarizedinTable1.NoticethatwithDRMprotection,thepiracylevelisgivenby
S=3e2TT 11t+2 M 1 +4t 1 2 RD M
T 3eT+8t 1
Allelsebeingequal,8ifDRMrestrictionsaremademorecumbersome(i.e.,as sumerswhowerebuyingthe increases),somecon-legalversionwillshifttowardstealing.Interestingly,evenintheextremecase,when piracy:
=0,westillcanseeapositivelevelof3e2TT 11t 3eM 1 4teM 1 2
2e8t 1
T 3eT+ThissuggeststhatpiracyisnotdrivensimplybythedisutilityassociatedwithDRMbutalsobythecostsandbene tsoftheavailablealternativesandthepro-portionofconsumerswhomightpotentiallyengageinpiracy.
7
Toseethis,notethatthereisnodifferenceintheutilitiesfromeitherofthesestrategiesacrossthetwosegments.
8
Onemightarguethatincreasing technicalcostofpiracy,e wouldalsoleadtoahigher T.However,thisisnotnecessarilythecase.Notethat includesthedisutilityofDRMrestrictionsthatareunrelatedtothecostofpiracy,e.g.,thefearoflosinglegallypur-chasedsongsasaresultofaccidents,thelackofinteroperability.Therefore,therecanbeinstanceswhereincreasing buyersandnotthepirates.Thisisconsistent affectsonlythelegalwithDoc-torow’s(2008)observationthatthepresenceofafewsophisticatedpiratescangreatlyfacilitatepiracywithouthavinganyimpactonlegalbuyers.
6
Table1
EquilibriumOutcomeswithTwoCompetingRetailers
Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM
MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS
Copyright:INFORMSholdscopyrighttothisArticlesinAdvanceversion,whichismadeavailabletosubscribers.The lemaynotbepostedonanyotherwebsite,includingtheauthor’ssite.Pleasesendanyquestionsregardingthispolicytopermissions@.
Traditionalandrestricteddownloadableversionsforsale
pRT= pRD= wRT= wRD=
2
3e2TT 1 3eM +2t 5eM 1
T2
3e2TT 1 3eM +12t eM 1
TTraditionalandunrestricteddownloadableversionsforsale
pUT= pUD= wUT= wUD=
2
3 2e2TT 1 3eMMT2
3 2e2TT 1 3eMM 1
TeTM 1
eTM 1
2t eM 1 +eT 3t+ 2
T eTT 3t +4t eM 1 2
T 3eT22223
e2T 1 12eMt+13t +8t eM 1
Tt 1 3eT+8t 1
eTM 1+
eTM 1
t 2 eMT 2
Tt eTTM 1 2
T 3 eT222223
6 3e3Tt+ eT 1 12eMt+13t +8teM 1
Tt 1 3 eT+8t 1
RT= RD= RL=
UT= UD= UL=
+
DRT= DRD= SR=
2t eM 1 +eT 3t+
T2222
6e3Tt+2eTt 1 3eMMt+2tM
Tt 1 3eT+8t 1
DUT= DUD= SU=
+
2t eMT
T2
2 eTt 1 2 3e2MMt+2t Tt 1 3 eT+8t 1
eTT 3t +4t eM 1
T 3eT eTTM 1
T 3 eT2
3e2TT 3eM 1 4t eM 1
T 3eT+8t 1 2
3 2e2TT 3eMM 1
T 3 eT+8t 1
3.2.SellingTraditionalFormatand
DRM-FreeDownloads
WenowconsiderthecasewhereretailerDsellsthealbumintheDRM-freedownloadableformatandretailerTsellsitinthetraditionalformat.Followingthesamelogicasintheprevioussection,wederivetheoptimalsetofprices:
pUT
2
3 2eTT 1 3eMM2
=
T+8t 1
words,thethinkingintheindustrywasthatDRMwould ghtpiracyandprotecttheindustry.Inthissection,wespeakdirectlytotheconventionalwisdomoftheindustry:WouldtheindustrybebetteroffifDRMrestrictionswereremoved?Inwhatfollows,welookattheimpactofremovingDRMonpiracyandonrecordlabelandretailerpro ts.
4.1.EffectonPiracy
Themostcommonargumentputforwardbypropo-nentsofDRMisthateliminatingDRMrestrictionswillunconditionallyincreasethelevelofpiracy.How-ever,becausetheimpactofremovingDRMaffectspricesandquantitiesofbothtraditionalCDsandonlinedownloads,thefullimpactofeliminatingDRMrestrictionsisnotcompletelystraightforward.NotethatpiracyexistsregardlessofwhethertherecordlabelchoosesDRMornot—sotheissueiswhetheritisaffectedsigni cantlybyDRM.TofullyunderstandtheimplicationsofremovingDRM,we rstfocusonthecasewherethereisnodisutilityimposedonlegalbuyersthroughthepresenceofDRM;i.e., =0.Asnotedearlier,thisisanidealDRMscenariowherethe rmimposesahigherstealingcostwithoutanyadverseeffectsonlegalbuyers’utilities.Thisleadstothefollowingproposition.
pUD
23 2eTT 1 3eMM 1 2=
2 1 3 eT+8t 1
wUT=
eTM 1+
wUD=
eTM 1
Theequilibriumpro ts,prices,demands,andpiracylevelsaresummarizedinTable1.
4.
Recallthattheconventionalwisdomintherecordindustrywasthatlegaldownloadswouldleadtoaproliferationofcopying,thusexacerbatingtheprob-lemofpiracy.Asaresult,alllegaldownloadswere rstmadeavailablestrictlywithDRM.Inother