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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14749
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| Title: | Are Digital Rights Valuable? Theory and Evidence from eBook Pricing |
| Authors: | Oestreicher-Singer, Gal
Sundararajan, Arun |
| Issue Date: | Jan-2006 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | CeDER-06-01 |
| Abstract: | The effective management of digital rights is the central challenge in
many industries making the transition from physical to digital products.
We present a new model that characterizes the value of these digital
rights when products are sold both embedded in tangible physical
artifacts, and as pure digital goods, and when granting rights permitted
by oneâs digital rights management (DRM) platform may affect the
extent of digital piracy. Our model indicates that in the absence of
piracy, digital rights should be unrestricted, since a seller can use
its pricing strategy to optimally balance sales between physical and
digital goods. However, the threat of piracy limits the extent to which
digital rights should be granted: the value of digital rights is
determined not only by their direct effect on the quality of legal
digital goods, but by a differential piracy effect that can lower a
sellerâs pricing power. When the latter effect is sufficiently
high, granting digital rights can have a detrimental effect on value
â our model indicates that this kind of effect is more likely to
be observed for digital rights that aim to replicate the consumption
experience of physical goods, rather than enhancing a customerâs
digital experience. We test the predictions of our analytical model
using data from the ebook industry. Our empirical evidence supports our
theoretical results, showing that four separate digital rights each have
an economically significant impact on ebook prices, and establishing
that the digital rights which aim to replicate physical consumption
while increasing the threat of piracy are the ones that have negative
impact on seller value. We also show that if the pricing of a digital
good is keyed off that of an existing tangible good, optimal pricing
changes for the former should be more nuanced, rather than simply
mirroring changes in the price of the latter, and we discuss the effect
of the technological sophistication of potential customers on optimal
pricing and rights management. Our results represent new evidence of the
importance of an informed and judicious choice of the different digital
rights granted by a DRM platform, and provide a new framework for
guiding managers in industries that are progressively being digitized. |
| URI: | http://hdl.handle.net/2451/14749 |
| Appears in Collections: | CeDER Working Papers
IOMS: Information Systems Working Papers
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