Music Downloads and the Flip Side of Digital Rights Manageme(11)

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

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

11

Table2EquilibriumOutcomesUnderPerfectCompetition

Traditionalandunrestricteddownloadableversionsforsale eTM 1+

eM 1

pUD=wUD=T

pUT=wUT=

2

4eTeM 1 +2e2M 1 T t+2e t =

T 1

1

DUT=

2eT 2eM

DUD=M

T e eM 1

SU=T

T UL

Copyright:INFORMSholdscopyrighttothisArticlesinAdvanceversion,whichismadeavailabletosubscribers.The lemaynotbepostedonanyotherwebsite,includingtheauthor’ssite.Pleasesendanyquestionsregardingthispolicytopermissions@.

TraditionalandrestricteddownloadableversionsforsaleeTM 1

eM 1

pRD=wRD=T

pRT=wRT=

222

2e2Tt+eT 4eMt+ t 1 +2t eM 1 =

Tt 1

t+

DRT=

e t +2t eM 1

DRD=T

Tt

eM 1

SR=T

T RL

(seeFigure1).However,therewasnodirectcompe-titionbetweenthelegaltraditionalandthepirateddownloadableformats.Onemightarguethatsomeconsumerschoosebetweenbuyingthelegaltradi-tionalversionandpiratingthedigitalcopyfromtheInternet.Inthissectionweaugmentthemainmodelbyallowingdirectcompetitionbetweenallthreeversions.

Asbefore,thelocationofthedownloadablemusicformatisattheleftextremeandthetraditionalmusicformatisattherightextremeoftheHotelling(1929)linesegment.Weassumethat proportionofcon-sumershasatotalcostofpiracyasinthemainmodel:

i

ei=eTx+eMwithDRMrestrictionsandeiU= eTx+ieM(where0< ≤1,i∈ H L )withoutDRMrestric-tions.Theremainingproportionof 1 consumers

i

hasatotalcostofpiracythatisei=eT+eMwithDRM

Ui

restrictionsandei= eT+eMwithoutDRMrestric-tions.Inotherwords,thepiracycostfor consumersisrelatedtotheirlocation,andfortheremaining 1 consumers,itisindependentoftheirlocation.Thus,forthe proportionofconsumers,theequi-libriumdemandwillbeasinFigure1,andfortheremaining 1 consumers,theequilibriumdemandwillbeasdepictedinFigure3.Therestofthemodelandouranalysisapproachremainunchanged,andthefullsolutionispresentedinTable3.

Inthisextendedmodel,whenwecomparethepiracyvolumewithandwithoutDRMrestrictions,we ndthattheresultstatedinProposition1Bstillholds,albeitwithadifferentcutoffpoint:

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