Incentive Systems in Multi-Level Markets for Virtual Goods

As an alternative to rigid DRM measures, ways of marketing virtual goods through multi-level or networked marketing have raised some interest. This report is a first approach to multi-level markets for virtual goods from the viewpoint of theoretical economy. A generic, kinematic model for the monetary flow in multi-level markets, which quantitatively describes the incentives that buyers receive through resales revenues, is devised. Building on it, the competition of goods is examined in a dynamical, utility-theoretic model enabling, in particular, a treatment of the free-rider problem. The most important implications for the design of multi-level market mechanisms for virtual goods, or multi-level incentive management systems, are outlined.Comment: 18 pages, 5 figures; graphics with reduced resolution. Full resolution available on author's homepage. Accepted contribution to the Workshop 'Virtual Goods' at the Conference AXMEDIS 2005, 30. November - 2. December, Florence, Ital

Digital Rights Management and the Pricing of Digital Products

As it becomes cheaper to copy and share digital content, vendors are turning to technical protections such as encryption. We argue that if protection is nevertheless imperfect, this transition will generally lower the prices of content relative to perfect legal enforcement. However, the effect on prices depends on whether the content providers use independent protection standards or a shared one, and if shared, on the governance of the system. Even if a shared system permits content providers to set their prices independently, the equilibrium prices will depend on how the vendors share the costs. We show that demand-based cost sharing generally leads to higher prices than revenue-based cost sharing. Users, vendors and the antitrust authorities will typically have different views on what capabilities the DRM system should have. We argue that, when a DRM system is implemented as an industry standard, there is a potential for "collusion through technology."

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

Managing Digital Piracy: Pricing, Protection and Welfare

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

An Economist's Guide to Digital Music

In this guide, we discuss the impact of digitalization on the music industry. We rely on market and survey data at the international level as well as expert statements from the industry. The guide investigates recent developments in legal and technological protection of digital music and describes new business models as well as consumers' attitude towards music downloads. We conclude the guide by a discussion of the evolution of the music industry

Digital Rights Management and Consumer Acceptability: A Multi-Disciplinary Discussion of Consumer Concerns and Expectations

The INDICARE project – the Informed Dialogue about Consumer Acceptability of DRM Solutions in Europe – has been set up to raise awareness about consumer and user issues of Digital Rights Management (DRM) solutions. One of the main goals of the INDICARE project is to contribute to the consensus-building among multiple players with heterogeneous interests in the digital environment. To promote this process and to contribute to the creation of a common level of understanding is the aim of the present report. It provides an overview of consumer concerns and expectations regarding DRMs, and discusses the findings from a social, legal, technical and business perspective. A general overview of the existing EC initiatives shows that questions of consumer acceptability of DRM have only recently begun to draw wider attention. A review of the relevant statements, studies and reports confirms that awareness of consumer concerns is still at a low level. Five major categories of concerns have been distinguished so far: (1) fair conditions of use and access to digital content, (2) privacy, (3) interoperability, (4) transparency and (5) various aspects of consumer friendliness. From the legal point of view, many of the identified issues go beyond the scope of copyright law, i.e. the field of law where DRM was traditionally discussed. Often they are a matter of general or sector-specific consumer protection law. Furthermore, it is still unclear to what extent technology and an appropriate design of technical solutions can provide an answer to some of the concerns of consumers. One goal of the technical chapter was exactly to highlight some of these technical possibilities. Finally, it is shown that consumer acceptability of DRM is important for the economic success of different business models based on DRM. Fair and responsive DRM design can be a profitable strategy, however DRM-free alternatives do exist too.Digital Rights Management; consumers; Intellectual property; business models