Digital Piracy: Theory

This article reviews recent theoretical contributions on digital piracy. It starts by elaborating on the reasons for intellectual property protection, by reporting a few facts about copyright protection, and by examining reasons to become a digital pirate. Next, it provides an exploration of the consequences of digital piracy, using a base model and several extensions (with consumer sampling, network effects, and indirect appropriation). A closer look at market-structure implications of end-user piracy is then taken. After a brief review of commercial piracy, additional legal and private responses to end-user piracy are considered. Finally, a quick look at emerging new business models is taken.information good, piracy, copyright, IP protection, internet, peer-to-peer, software, music

Digital piracy : theory

This article reviews recent theoretical contributions on digital piracy. It starts by elaborating on the reasons for intellectual property protection, by reporting a few facts about copyright protection, and by examining reasons to become a digital pirate. Next, it provides an exploration of the consequences of digital piracy, using a base model and several extensions (with consumer sampling, network effects, and indirect appropriation). A closer look at market-structure implications of end-user piracy is then taken. After a brief review of commercial piracy, additional legal and private responses to end-user piracy are considered. Finally, a quick look at emerging new business models is taken.information good, piracy, copyright, IP protection, internet, peer-to-peer, software, music

Piracy of Digital Products: A Critical Review of the Economics Literature

Digital products have the property that they can be copied almost costlessly. This makes them candidates for non-commercial copying by final consumers. Because the copy of a copy typically does not deteriorate in quality, copying products can become a wide-spread phenomenon – this can be illustrated by the surge of file-sharing networks. In this paper we provide a critical overview of the literature that addresses the economic consequences of end-user copying. We conclude that some models with network effects are well-suited for the analysis of software copying while other models incorporating the feature that copies provide information about the originals may be useful for the analysis of digital music copying.information good, piracy, copyright, internet, peer-to-peer, software, music

Are Digital Rights Valuable? Theory and Evidence from eBook Pricing

The effective management of digital rights is the central challenge in many industries making the transition from physical to digital products. We present a new model that characterizes the value of these digital rights when products are sold both embedded in tangible physical artifacts, and as pure digital goods, and when granting rights permitted by oneâs digital rights management (DRM) platform may affect the extent of digital piracy. Our model indicates that in the absence of piracy, digital rights should be unrestricted, since a seller can use its pricing strategy to optimally balance sales between physical and digital goods. However, the threat of piracy limits the extent to which digital rights should be granted: the value of digital rights is determined not only by their direct effect on the quality of legal digital goods, but by a differential piracy effect that can lower a sellerâs pricing power. When the latter effect is sufficiently high, granting digital rights can have a detrimental effect on value â our model indicates that this kind of effect is more likely to be observed for digital rights that aim to replicate the consumption experience of physical goods, rather than enhancing a customerâs digital experience. We test the predictions of our analytical model using data from the ebook industry. Our empirical evidence supports our theoretical results, showing that four separate digital rights each have an economically significant impact on ebook prices, and establishing that the digital rights which aim to replicate physical consumption while increasing the threat of piracy are the ones that have negative impact on seller value. We also show that if the pricing of a digital good is keyed off that of an existing tangible good, optimal pricing changes for the former should be more nuanced, rather than simply mirroring changes in the price of the latter, and we discuss the effect of the technological sophistication of potential customers on optimal pricing and rights management. Our results represent new evidence of the importance of an informed and judicious choice of the different digital rights granted by a DRM platform, and provide a new framework for guiding managers in industries that are progressively being digitized.Information Systems Working Papers Serie

Efficient Contracts for Digital Content

This paper analyses efficient contracts for digital content, focusing on the music industry. It contributes to the quest for an efficient intellectual property rights environment for information goods. Moreover, it adds an interesting application to the field of behavioural economics. The model is set in a contract theory framework with the copyright holder being the principal and a consumer the agent. We offer three contract cases for analysis: strong copy protection, a strategically low price and voluntary reciprocal contributions. Insights from the economics of information and behavioural economics - information goods have public goods properties; social preferences are significant among individuals - are applied to examine the value of a strict copyright enforcement in the digital age. We find that endogenous incomplete contracts based on fair, reciprocal behaviour may achieve a first-best allocation of information goods, while complete contracts are limited to second-best results.internet, music industry, social preferences, reciprocity, moral hazard, file sharing

The economics of copyright law: a stocktake of the literature

This article is a survey of publications by economists writing on copyright law. It begins with a general overview of how economists analyse these questions; the distinction is made between the economics of copying and the economic aspects of copyright law as analysed in law and economics. It then continues with sections on research on the effects of copying and downloading and the effects of unauthorised use (‘piracy’) and ends with an overall evaluation of the economics of copyright in the light of recent technological changes. Economists have always been, and still are, somewhat sceptical about copyright and question what alternatives there are to it. On balance, most accept the role of copyright law in the creative industries while urging caution about its becoming too strong. And although European authors’ rights are different in legal terms from the Anglo-American copyright, the economic analysis of these laws is essentially the same

Are Digital Rights Valuable? Theory and Evidence from the eBook Industry

The effective management of digital rights is a crucial challenge in many industries making the transition from physical to digital products. We present an economic model that characterizes the value of digital rights when products are sold both embedded in tangible physical artifacts and as pure digital goods, and when granting digital rights may also affect the extent of digital piracy. Our model indicates that in the absence of piracy, digital rights should be unrestricted, since a seller can use their pricing strategy to optimally balance sales between physical and digital goods. However, the threat of piracy limits the extent to which digital rights should be granted: the value of digital rights is determined not only by their direct effect on the quality of legal digital goods, but by their effect on the differential quality of legal and pirated digital goods. When the latter effect is negative, granting digital rights may have a detrimental effect on value; our model indicates that this kind of effect is more likely to be observed for digital rights that aim to replicate the consumption experience of physical goods, rather than enhancing a customer’s digital experience. We test the predictions of our analytical model using data from the ebook industry. Our empirical evidence supports our theoretical results, showing that four separate digital rights each have a significant impact on ebook prices, and establishing that those two that are most strongly associated with digital piracy have a negative impact on seller value. We also show, both analytically and empirically, that sellers should increase the prices of digital goods as the prices of their physical counterparts increase, but decrease them as the technological sophistication of their potential customers increases. Our results represent new evidence of the importance of an informed and judicious choice of the different digital rights permitted by one’s DRM platform, and provide a framework for guiding managers in industries that are progressively being “digitized.”NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc

A model of music piracy with popularity-dependent copying costs

Anecdotal evidence and recent empirical work suggest that music piracy has differential effects on artists depending on their popularity. Existing theoretical literature cannot explain such differential effects since it is exclusively concerned with single-firm models. We present a model with two types of artists who differ in their popularity. We assume that the costs of illegal downloads increase with the scarcity of a recording, and that scarcity is negatively related to the artist’s popularity. Moreover, we allow for a second source of revenues for artists apart from CD sales. These alternative revenues depend on an artist's recognition as measured by the number of consumers who obtain his recording either by purchasing the original or downloading a copy. Our findings for the more popular artist generalize a result found by Gayer and Shy (2006) who show that piracy is beneficial to the artist when alternative revenues are important. In our model, however, this does not carry over to the less popular artist, who is often harmed by piracy even when alternative revenues are important. We conclude that piracy tends to reduce musical variety.Piracy, file sharing, heterogeneous artists

A model of music piracy with popularity-dependent copying costs

Anecdotal evidence and recent empirical work suggest that musicpiracy has differential effects on artists depending on their popularity.Existing theoretical literature cannot explain such differential effectssince it is exclusively concerned with single-firm models. We present amodel with two types of artists who differ in their popularity. Weassume that the consumers' costs of illegal downloads increase withthe scarcity of a recording, and that scarcity is negatively related to theartist's popularity. Moreover, we allow for a second source of revenuesfor artists apart from CD sales. These alternative revenues depend onan artist's recognition as measured by the number of consumers whoobtain his recording either by purchasing the original or downloadinga copy. Our findings for the more popular artist generalize a resultfound by Gayer and Shy (2006) who show that piracy is beneficial tothe artist when alternative revenues are important. In our model,however, this does not carry over to the less popular artist, who isoften harmed by piracy even when alternative revenues are important.We conclude that piracy tends to reduce musical variety.piracy, file sharing, heterogeneous artists.