Substituting piracy with a pay-what-you-want option: does it make sense?

Rather than tolerating piracy or increasing sanctions, an artist can release his product directly to consumers by allowing them to download it under a ‘pay-what-you-want' online strategy. We show analytically that this strategy can (1) be more profitable than a strategy with perfect or imperfect intellectual property rights enforcement for the artist and (2) change the organization and allocation of added value between artists and publishers along the supply chain. This higher profit result is achieved through an increased demand for live performance and positive voluntary contributions of downloaders directly pocketed by the artist. Indeed, a ‘pay-what-you-want' strategy allows artists to reduce piracy without using sanctions while benefiting from a strategic negotiation ‘weapon' in the relationship with record labels. Moreover, consumers draw procedural utility from the way the product is delivered. Counter-intuitively, rather than advocating for elimination of conventional releases at posted prices, pay-what-you-want strategies may need them to remain successful. A brief case study of Radiohead's experiment and anecdotal evidence are developed to support these theoretical insights. Some implications regarding the re-organization of the supply chain and property rights regime are drawn.