Music Downloads and the Flip Side of Digital Rights Manageme(12)

12

Figure3

ImpactofRemovingDRMonRecordLabelPro ts

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

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

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SegmentH:Download retailer,pirated sources

Traditionalretailer

Download retailer,pirated sources

Traditionalretailer

piracy,butwealsoconsidertheimportantroleplayedbytheretailersandhowitaffectsupstreampro ts.Moreover,theextantliteraturelooksatthecompeti-tionbetweenpiratedsourcesversuslegalmusicsalesasawhole,whereaswemodelstrategicbehaviorofdownloadandtraditionalretailersastwodifferentsourcesoflegalmusic.Byanalyzingthecompetitionamongthetraditionalretailer,thedownloadretailer,andpiratedmusic,wegetabetterunderstandingofthecompetitiveforcesinthemarket.Asaresult,unliketheearlierliterature,weendogenizenotonlypiracyvolumebutalsoconsumers’choicesbetweentraditionalCDsanddigitaldownloads.

Incertaininstances,we ndthateliminatingDRMrestrictionscanleadtoanincreaseinsalesoflegaldownloads,adecreaseinsalesoftraditionalCDs,andadecreaseinpiracy.ThisisinstarkcontrasttotheviewthatremovingDRMwilluncondition-allyincreasethelevelofpiracy.ThisconclusionstemsfromtheideathatbyintroducingDRM-freemusic,

Table3

themusiclabelincreasesthedownstreamcompetitionbetweenthetraditionalformatandlegaldownloads.BecauseDRM-freemusicisastrongercompetitorfortraditionalCDs,itforcesthepricesofCDstomovedown,whichinturnlowersthelegaldownloadprice.Thiscompetitionbetweenthetraditionalanddown-loadformatslowerspricessuchthatsomeconsumersmovefromstealingmusictobuyinglegaldownloads.Thus,removingDRMcanlowerthelevelofpiracy.Furthermore,we ndthatthisresultcanoccurevenwhenconsumersdonotseeanydifferenceintheutil-itytheyderivefromDRM-freeandDRM-restrictedproducts.

Ouranalysisalsogeneratesseveraladditionalcoun-terintuitiveresults.ByremovingDRMandmakingillegalcopyingeasier,therecordlabelcanbene tfromtheintensi edcompetitionbetweenpiratedmusicandthedownloadretailer.Furthermore,thissuggeststhatDRMmayprotectthe“traditionalbusinesses,”thatis,retailersofCDs,morethantheyprotectthe

EquilibriumOutcomesUnderDirectCompetitionBetweenPiratedDigitalandLegalTraditionalFormats

Traditionalandunrestricteddownloadableversionsforsale

wUT= wUD=

2

2t eM2T 1 +eT eM 1 +t 2 + 2 3 +

T 1

Traditionalandrestricteddownloadableversionsforsale

wRT= wRD=

2

2t eM2T 1 +eT eM 1 +t 2 3 2 +

T 1

2t eM +e2T 1 +eT 1 2t+ eM

T 1

4t eM+wRD +e2T 1

T 1 3t+2wRDRTM 1+

2eMt +e2T 1 +eT 1 2t+eM

T 1

4t eMUD +e2T 1 +eT 1 3t+2wUDUTM

T 1 3+

2e2T 1 +2t eM 1+ +2t+wUD 1 +2wUT

T t 3 1 +4 + 1 wUD 1 +2 wUTM

pRD=

T 1 3+

pUD=

pRT=

2e2T 1 +2t eM 1+ +2t+ wRD+ 1 +2wRT

T 1 wRD 1 +2 wRTM +t 3 4 1+ + 2

T 1 3+

pUT=

T 1 3+

DRT=

2e2T 1 +2t 2t+ 1 +eM 1+

1 +2eM +t 3 4 1 + 2

T 1 3+

2t +eT 1 4t eM +e2T 1 T 1 3t 1+ +eM

TT DUT=

2e2T 1 +2t eM 1+ +2t

T 2eM 1 t 4 + 3 4 + 2

T 1 3+

DRD=

DUD=

2t +eT 1 4eMt +e2T 1 +eT 1 3t+eM

TT

RL=wRTDRT+wRDDRD

UL=wUTDUT+wUDDUD

Note.Where = 1 and = 1 1 .