Music Downloads and the Flip Side of Digital Rights Manageme(9)

increasethetechnicalcostofpiracyprimarilybecauseofthepredictabilityofitseffect:increasingmoralcostsunambiguouslyincreasestherecordlabel’spro ts,whereashighertechnicalcostmightleadtolowerorhigherpro ts.Furthermore,iftheindustryisabletoestablish“copyingisstealing”asasocialnorm,thenitwillprobablynothavetoincurthiscostrepeatedly;ontheotherhand,eachtimepiratescrackthecode, rmswillhavetorepeatedlyincurthecostsofdevel-opingnewtechniquestopreventcopying.

ers.The lemaynotbeermissions@.

oflegaldownloadscomparedwiththetraditionalfor-matalbums.

Proposition3isimportantbecauseitshowsthatthelinkbetweenpiracyvolumeandrecordlabels’pro tsmaynotalwaysworkinthewaythattherecordingindustrybelieves:areductioninpiracymayormaynotresultinanincreaseoftherecordlabel’spro ts.4.3.EffectonRetailers

WenowexaminehowtheremovalofDRMrestric-tionsaffectstheretailersinouranalysis.

bpircotsProposition4.WhenDRMrestrictionsareremoved,byucsithedownloadretailer’spro tincreases,andthetraditionalloopretailer’spro tmayincreaseordecrease.

tesilbhtaligingPropositionnvaiadterDRMissuch4showsthatthethatdownloadtheneteffectretailerofremov-reanotoff,dgaerchangesbebetterwhereasoff.theThistraditionalresultretailermayorismaybet-msthatsnioiditionalthelegalthatweispartlybecauseofthedownloadhavediscussedearlier:theparityhtscieofpricedemand.formatInaddition,andtheachievesrelativetothetra-thechangesinpricesensitivityhuwq,ysitionalsonnoaiprice4.Speci cally,contributetochangesinthewholesalewhentheresultsdescribedinPropo-srdnofveesmitigatepiracy,declinesebecauseofchangesthedownloadinthetechnicalretailer’scostT,ecensbothretailers.

thenegativereductionseffectsintheoflowertwowholesaleretailpricespricesforavaedlAP4.4.ImpactofPiracyCosts

ne.Weitisssumers’haveelc’srcalcostassumedofthattwocomponentsofthecon-itorAhItcosts,epiracy,moralcost,eM,andtechni-T,areoutsidetherecordtusaingis,ihtesumers’industryhowever,tradepossibleassociationsthattherecordlabel’scontrol.canlabelorrecord-ohttunethicalmoraltghnple,andcostillegalofpiracyaspectsbyin uencecon-ofeducatingpiracy.themaboutgiidrthatinyulpcthe“copyingapopularisstealing”advertisingwascampaign,designedtheForexam-toreinforcemessageonicThenotionthatdownloadingfrompiratesisillegal.se,dtisuitsRIAAhasalsobroughthighlypublicizedlaw-loshbelibrariesagainstconsumerswhohavesharedtheirmusicSwforMrRehpiracy,belAnotheristocommonlyaffectthetechnicalpracticedcostsoptionofOtatingforexample,bytrackingbittorrentusage,cre-FoNypeerIna:thethngointerestinggrowingnetworksfakebittorrentservices,orin ltratingpeer-to-trendwithvirusesandothermalware.WithirydarepetosCopincreasesWithoutaffectedtoofprovidingDRM-freemusic,itisDRMbyexaminethehowtherecordlabel’spro tsrestrictions,effortstoin uencetherecordeMlabel’sandeTpro t.increaseorwithdecreasethemoralwiththecoststechnicalofpiracycostsofbutmaymayPropositionbeamore5showspro tablethatincreasingapproachthethanmoralpiracy.tryingcoststo

InModelExtensions

ofthistherethesection,weanalyzetheeffectofrelaxingsomeDRMareassumptionsthreenaturaloftheextensionsbasicmodel.toInparticular,buyers.restrictionssuchlegalthatSecond,mayyieldapositiveconsider.utilitytoFirst,legaltherearetheremultipleiscompetition rmssellingwithinCDsformatandoptionsdownloads.amongstealingAndthird,andbuyingconsumerslegalfaceproducts.multiple5.1.PositiveValueofDRMRestrictions

Asuationnotedearlier,werepresentaassumedforthemusicalbumbyconsumer’s >0.Earlier,baseval-legalthatbuyersthatbyDRM restrictionsloweredtheutilitywefor ingunderstandthatsometheylegalarebuyers>0.However,playingmayarolefeelitcouldbearguedinreducingevenbetterpiracy.know-DRM,bemusicdenotedletthethebyeffectconsequencesofthispositivevalueToof DRMofDRMonconsumers’baseutility>0.AsferDRM-restrictedintherestrictedDRMmusicformat,aresult,getahigherconsumerswhenobtainingutilitywhoof pre- as+ R=2009,a“frustrating,whereasp.569)obtainimpedimentthosewhoviewthelowerutilitytolawfulDRMprotectionof use”(BridyR= DRMThe.musicproportionaggregateisrepresentedofconsumersby0≤ ≤that1.Weprefers ndthatDRM-freeatthewhereallmarketconsumerslevel,havethissetup isequivalenttoone R= ,where 2 =ferResearch 1 DRM(e.g.,digitalmusicsuggests(seeAppendixthatthatBfordetails).

doesamajoritynothaveofDRMconsumerspre-ular,rejecttheBerrysistentanyIDC2002,restrictions(2002)PfeifferestimatesConsulting2001).restrictionsInpartic-imposedthatbyDRM.73%ofThisconsumersiscon-EMIoverwhelminglyGroup:withthe“IncommentsallofEricNicolli,theCEOofathatoftheyourresearch,wouldbeconsumerspreparedtellususehigherpricefordigitalmusic lesthattheytocouldpayisingimportantonanyplayer.tomusicIt’sbuyers,cleartousthatinteroperabilityWithinandenergizingthedigitalbusiness”andisakey(Fultontounlock-majoritythe(i.e.,ofcontextconsumersofourmodel,thisimpliesthat2007).theallhold.

>1/2,andhencedo notseeDRMasapositive >0),andourbasicresults