Music Downloads and the Flip Side of Digital Rights Manageme(5)

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

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

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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

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.

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Toseethis,notethatthereisnodifferenceintheutilitiesfromeitherofthesestrategiesacrossthetwosegments.

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Onemightarguethatincreasing technicalcostofpiracy,e wouldalsoleadtoahigher T.However,thisisnotnecessarilythecase.Notethat includesthedisutilityofDRMrestrictionsthatareunrelatedtothecostofpiracy,e.g.,thefearoflosinglegallypur-chasedsongsasaresultofaccidents,thelackofinteroperability.Therefore,therecanbeinstanceswhereincreasing buyersandnotthepirates.Thisisconsistent affectsonlythelegalwithDoc-torow’s(2008)observationthatthepresenceofafewsophisticatedpiratescangreatlyfacilitatepiracywithouthavinganyimpactonlegalbuyers.