|
Archive@NYU >
Stern School of Business >
Economics Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26168
|
| Title: | Managing Digital Piracy: Pricing, Protection and Welfare |
| Authors: | Sundararajan, Arun |
| Issue Date: | Jun-2003 |
| Series/Report no.: | EC-03-15 |
| 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 (DRM) 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, some social welfare issues are
discussed, and ongoing work on the role of usage externalities in
pricing and protection is outlined. |
| URI: | http://hdl.handle.net/2451/26168 |
| Appears in Collections: | Economics Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
