Music Downloads and the Flip Side of Digital Rights Manageme(8)

8

Proposition2A.When =0,thenremovingDRMrestrictionsleadstoanincreaseinpro tsfortherecordlabeliff

1 ATeMt 1 3eT2

> = T 3eT+8t 1

22

whereA=24eTt eT 9eM 18eMt 46t2 1 212eMt 1 2.

Vernik,Purohit,andDesai:MusicDownloadsandtheFlipSideofDRM

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

ers.The lemaynotbe

ermissions@.

Proposition2Ashowsthatevenwhen =0,andtheDRMproductprovidesnodisutilitytolegalbuy-theincentivestoincreaseitcomefromthehigher

productbene tenjoyedbytheconsumers.When issuf cientlyhigh,therecordlabelearnsahigherpro twithoutDRMbecauseofeitherthehighertotalsalesorthehigherwholesalepriceforthelegaldownload,orbecauseofacombinationofthetwo.

Propositions1and2showthatrecordlabelpro tandtheoverallpiracylevelcanincreaseordecreasewhenDRMrestrictionsareremoved.Furthermore,conventionalwisdomsuggeststhatanincreaseinpiracywouldleadtolowerpro ts.However,thebpircotsers,butheitspricerestrictions.stillmightThisbeoptimalycoccursforthe rmtoremoveilooptesDRMsensitivityilbhtlabel.isremoved,ofresultingthedemandbecauseinhigherthatofthegreaterpro tscomesforwhenaligncanInterestingly,inthiscase,thedownloadretailerthevaiaddecreasesalsoearneisandithigherpro tsmainlybecausepiracyradgaeraremovalonlythetraditionalearnsretailerahigherthatmarginstandsontoalllosesales.withItmssnioitheNow,htscieitabilityimpactweofofofconsiderDRM.

theremovingtherecordlabel.

DRMgeneralrestrictionscasewhenon the>0prof-andhuwqProposition2B.Therecordlabelearnsahigherpro t,ynnoabyremovingDRMrestrictions,iff > ,where

isrdnvee

=t eTst 3eTet 1 +8Tt 1 +16t 1 et 1

ceTnsavae = 1 T3eT +8t 1

dlAPne.and

itissel =e3c’sTt 24 22

ritorAhtu· t2 16+ 1 2eT 1 2

14 23 +6eMt 1 3 3e2

M 1

saihte+8eTeMt 1 3 eM 1+ +6t

ohtttg+32e2Mt2 1 4 6e4T 1 2

hngiidryulpcofTherecordlabel’spro tisdeterminedonicthelegalse,dtimats.wholesaledownloadspricesasthatwellitchargesastraditionalbythesalesfortheCDsandloshbeaSwDRMthreshold,Propositiontotal1Bsalesshowsoflegalthataslongas twofor- isaboveMrRehtionalrestrictionsareremoved.Inmusicaddition,increasethewhenOtlegalformatlosesitscompetitiveadvantageovertradi-theFoNyTherefore,downloadsIna:thethngothisrecordwithlabelthewhenshiftsremovalDRMofrestrictionsDRM,thearesalesremoved.mixforirydthepetoswhenwholesaleeffectbecomespricestrongertowardofthetraditionalas legaldownloads,and increases.musicAlthoughCoppriceThebecauseincentivesforDRMtherestrictionslegalareremoved,thewholesaledecreasestodownloadscangoeitherway.morepricethesensitivedemanddecreasewhenforthethewholesalepriceariseDRMlegalisdownloadremoved,becomeswhereas

followingalwaysthepropositioncase.

demonstratesthatthisisnotProposition3.(1)If > S

,thenfor Spro t

goes ,piracydown.volume(2)If goes down,andtherecord∈

piracyvolumegoesup,and the< Srecord ,thenfor label’spro t ∈ label’s

S

goes up.

,theThethreshold levelthreshold Scouldbehigheror .When >max S

lowerthan

tions,goesanddowntherecordwith ,thepiracylabel’stheremovalpro tofgoesDRMup.restric-When

removal <min S

,thepiracylevelincreaseswiththepro tforgoesofdown.DRMrestrictions,Interestingly,andwhenthe record > S

label’s

,then

without S <(seeDRM <despite

thetherecordlabel’spro tislowerneedsFigureditionaltocharge2(a)).aThislowerispiracywholesalebecausevolumepricetherecordbeinglowerforthelabelremoved.formatchargeloadalowerInaddition,albumwhenDRMrestrictionstra-arewholesalethepricerecordforlabelmayalsodemand.becausetheAsFigureofthe2(b)increasedshows,pricethewhensensitivitylegaldown- ofits

S

tionsrecordup.areremovedlabel’spro t< < ,evenincreasesthoughthewhenpiracyDRMrestric-chargeThisoccursbecausetherecordlabellevelisablegoesload,andahigheritssaleswholesalemixmovespricetowardforathehigherlegalfraction

down-toFigure2

EquilibriumDemandforLegalandIllegalVersions

(a)

Piracy

Piracy

Π

S

Profit

Profit(b)

Piracy

Piracy

Π

S

Profit

Profit