Music Downloads and the Flip Side of Digital Rights Manageme(10)

10

5.2.PerfectIntraformatCompetition

Inthemainmodelsetup,weconsideredoneInter-netandonetraditionalretailer.Inotherwords,themainmodelcapturesinterformatcompetitionbutnotintraformatcompetition.Inpractice,therearemulti-pleretailerssellingthemusicineachformat,withmanyofthemenjoyingdownwardslopingdemandsbecauseoftheirdifferentiationstrategies.BecausesomeofourmainresultsariseasaresultofchangesinpriceswhenDRMrestrictionsareremoved,itmightappearthatallowingforcompetitionamongVernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

MarketingScience,ArticlesinAdvance,pp.1–17,©2011INFORMS

ers.The lemaynotbeermissions@.

hand,thereductioninthetechnicalcostofpiracyleadstomoreintensecompetitionbetweenlegalandpiratedformsofdigitalmusic,creatingadownwardpressureonthewholesalepriceforthedigitalalbum.Intermsofpiracy,wehavethefollowingresult.Proposition5.Inthecaseofperfectintraformatcom-petitionamongretailers,removingDRMalwaysleadstoadecreaseinpiracy.

Propositions1Aand1Bshowedthatwithoutintraformatcompetition,thepiracyvolumemightbpircotthesbycweretailersmayweakenthoseresults.Inthissection,usilooptformatWeexploreassumethisthatpossibility.

thereareesilbhtition,talgwholesalesoandthatthatthetheyequilibriumareengagedmanyretailerssellingeachretailinBertrandcompe-invaidmusicareagofformatprices.isatAsthebefore,thelocationpricesofaretheequaldigitaltodaerofthemsnmodelthetraditionalHotelling(1929)musicleftformatextremeisattheandrightthelocationextremesioihtscetheIntheandcaseourlinesegment.TherestofthewithanalysisDRMapproachremainunchanged.ihuwqidenti edconsumer,ynitiesasinindifferentthebasicbetweenrestrictions,modelbythethetwolocationformatsofisnoaisolvingURDSeach x =forURDBx. x andURDBequating x =URTB

theutil- x andthensrdnwithinveesisecensp thesameeachformat,Becausetheretailofthepriceperfectforcompetition

each

format

avaetionRD=.Weasthenthesolvewholesaletherecordprice:pRT=wRTanddlAPsaleprices:

problemwRD

toobtainthefollowinglabel’soptimaloptimiza-whole-ne.itissew RT

lc’s=eTM 1

r2 1

and

itorAhtusaw RDi=

eTMh 1

teohtttghnisThegiroptimalsolvedcaseretail/wholesaleinwhenthesamedigitalfashion,musicissoldwithoutDRMidyuprices:

yieldingthefollowinglpconicse,p eTUTdti=w UT=

M 1+

2 1

and

loshbeSwp UDMr=w eTUD=

M 1

RehOtFoTheNyIna:withFromfullsolutiontheaboveisexpressions,providedinTableitis2.

thngoinirydpeforthethetraditionaleliminationformatofDRM,thepriceeasyfortotheseealbumthattosdecrease.themusicCopmainHereinagain,thedigitaldecreases,butthepricethetrade-offformatmayincreaseortalwhichmusicmodelbecomesapplies.moreOnattractivetheoneobservedinthetohand,beltoOnincreaseconsumers,theother

theincreasetiontion,6advantageretailersshowsordecreasethatarenotwithwithDRMremoval.Proposi-ableperfecttoincreaseintraformatpricecompeti-totakeremovalvolumeofofDRMtheincrementalrestrictions.utilityAsprovidedbythethatalwaysgoesdown.Thisaresultresult,alsotheimpliespiracycientlywhenfortotherecordstrong,thelabelsomeintraformatareofreducedthebene tscompetitionisnotsuf -bytheofremovingretailers’abilityDRMwhenWhenchargecomparinghigherpricesrecordforthelabels’DRM-freepro tsmusic.

DRM,stillholds,wetheseedigitalmusicissoldwithandinwithoutcasesjustthatwiththeadifferentresultstatedcutoffinpoint:

Proposition2B eT =

tM 1

eT t+ 22te 3

1

T 1 t 4 3 1

+2eTeM eM 1 +2t 1 2

4e2Mt 1 3 1 1/2

· eT+2t 1 1 1

meansTheabovetheleadeliminationthatthecutoffrecordpointcouldbenegative,whichofDRMlabel’sevenpro twhenmaydoingincreasewithtotoahigherutilityforconsumers.ThissoisdoessimilarnotbyInthesummary,resultinPropositionwe2Ainthebasicmodel.duceourmainmodel ndarethatpreservedtheinsightswhenweprovidedever,intraformatforwhenremovingcompetitionDRMleadsamongtoretailers.How-intro-capitalizeconsumers,thedigitalretailersareahighernotableutilitytoThisbiggermeansonthattheremovinghigherutilityDRMbyalwaysincreasingprices.toincreaseinthesalesoflegalmusic.leadsIttoapro tsseethattheretailersdonotearnanyeconomiciseasyanyrecordpositiveevenwhenlabel.impactDRMofremovingrestrictionsDRMareaccruesremoved,tobutthe5.3.

CompetitionBetweenPiratedDigitalandLegalTraditionalFormats

Inourthisloadablemainsection,ditionalformatformatmodel.weconsiderthe nalextensionofcompetedInthemainortheillegalagainstmodel,downloadableeitherthethelegallegaldown-format

tra-