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Managing Digital Piracy: Pricing, Protection and Welfare

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  • Arun Sundararajan

    (New York University)

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

Suggested Citation

  • Arun Sundararajan, 2003. "Managing Digital Piracy: Pricing, Protection and Welfare," Law and Economics 0307001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwple:0307001
    Note: Type of Document - PDF; prepared on Windows NT; pages: 40 ; figures: included
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    digital piracy; digital rights management; DRM; information goods; nonlinear pricing; screening; type-dependent participation constraints; copyright; IP; intellectual property;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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