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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14154
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| Title: | Managing Digital Piracy: Pricing, Protection and Welfare |
| Authors: | Sundararajan, Arun |
| Issue Date: | May-2003 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | IS-03-05 |
| Abstract: | This paper analyzes the optimal choice of pricing schedules and
technological deterrence levels in a market with digital piracy, when
legal sellers can sometimes control the extent of piracy by implementing
digital rights management (DM) systems. It is shown that the seller's
optimal pricing schedule can be characterized as a simple combination of
the zero-piracy pricing schedule, and a piracy-indifferent pricing
schedule which makes all customers indifferent between legal consumption
and piracy. An increase in the level of piracy is shown to lower prices
and profits, but may improve welfare by expanding the fraction of legal
users and the volume of legal usage. In the absence of
price-discrimination, the optimal level of technology-based protection
against piracy is shown to be the technologically-maximal level, which
maximizes the difference between the quality of the legal and pirated
goods. However, when a seller can price-discriminate, it is always
optimal for them to choose a strictly lower level of technology-based
protection. Moreover, if a DRM system weakens over time, due to its
technology being progressively hacked, the optimal strategic response
may involve either increasing or decreasing the level of
technology-based protection and the corresponding prices. This direction
of change is related to whether the technology implementing each
marginal reduction in piracy is increasingly less or more vulnerable to
hacking. Pricing and technology choice guidelines based on these results
are presented, and some social welfare issues are discussed. |
| URI: | http://hdl.handle.net/2451/14154 |
| Appears in Collections: | IOMS: Information Systems Working Papers
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