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http://hdl.handle.net/2451/27797
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| Title: | Managing Digital Piracy: Pricing and Protection |
| Authors: | Sundararajan, Arun |
| Keywords: | piracy
digital piracy
piracy deterrence
copyright
digital rights management
DRM
nonlinear pricing
price discrimination
screening
intellectual property
enforcement |
| Issue Date: | Sep-2004 |
| Publisher: | Information Systems Research |
| Citation: | Vol. 15, No. 3, September 2004, pp. 287–308 |
| Series/Report no.: | CeDER-PP-2004-02 |
| Abstract: | This paper analyzes the optimal choice of pricing schedules and
technological deterrence levels in a market with digital piracy where
sellers can influence the degree of piracy by implementing digital
rights management (DRM) systems. It is shown that a monopolist’s
optimal pricing schedule can be characterized as a simple combination of
the zero-piracy pricing schedule and a piracy-indifferent pricing
schedule that makes all customers indifferent between legal usage and
piracy. An increase in the quality of pirated goods, while lowering
prices and profits, increases total surplus by expanding both the
fraction of legal users and the volume of legal usage. In the absence of
price discrimination, a seller’s optimal level of technology-based
protection against piracy is shown to be at the technologically maximal
level, which maximizes the difference between the quality of the legal
and pirated goods. However, when a seller can price discriminate, its
optimal choice is always a strictly lower level of technology-based
protection. These results are based on the following digital rights
conjecture: that granting digital rights increases the incidence of
digital piracy, and that managing digital rights therefore involves
restricting the rights of usage that contribute to customer value.
Moreover, if a digital rights management system weakens over time due to
the underlying technology being progressively hacked, a seller’s
optimal strategic response may involve either increasing or decreasing
its level of technology-based protection. This direction of change is
related to whether the DRM technology implementing each marginal
reduction in piracy is increasingly less or more vulnerable to hacking.
Pricing and technology choice guidelines are presented, and some welfare
implications are discussed. |
| URI: | http://hdl.handle.net/2451/27797 |
| Appears in Collections: | CeDER Published Papers
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