Essays on Digital Distribution of Information Goods.
The ability to digitize information goods such as music and movies and the growing accessibility of the Internet has led to online piracy and the emergence of a new class of retailers that specialize in digital downloads. Both online piracy and digital retailers have changed the dynamics of the information goods distribution channel. In my dissertation I focus on issues related to this change.
In the first chapter, "Digital music set free: the flip side of DRM," I study the effect of Digital Rights Management (DRM) mechanisms on the competition between traditional and digital retailers and on online piracy. DRM refers to technologies designed to control how end users may access, copy, or convert digital media. In the context of music downloads, DRM makes piracy of digital music more difficult, and until recently, most legal outlets for downloadable music only sold songs with DRM protection. Recently download retailers have convinced record companies to allow them to sell DRM-free music. The introduction of DRM-free music raises several important questions: Will music piracy increase as the opponents of DRM-free music predict? Will the music industry profits go up or down? How will CD retailers be affected? Will all labels start selling the unprotected (DRM-free) content?
I address these and related questions by developing a model of a music distribution channel that allows a record label to sell through both traditional CD retailers and iTunes-like download services at different wholesale prices. Among the interesting results, the analysis indicates that the level of piracy may decline when DRM protection is removed and that the traditional retailers much prefer to compete with distributors of pirated digital music rather than with legal music download services.
The competition between online and traditional retailers has led to interesting pricing policies on which I focus in the second chapter, "Digital movies at one simple price: the effect on competition." Online retailers tend to prefer uniform pricing (e.g. iTunes Store) where all "products" carry a single price, while traditional retailers do not have a policy of uniform prices. It is important to understand why one retailer should choose a single, uniform price and what impact it has on the competing retailer who chooses multiple prices. I focus specifically on the impact that single price policy adopted by digital retailer has on the traditional retailer. I also analyze the choice of uniform vs. differentiated pricing by modeling the competition between online and traditional retailers for vertically differentiated information goods. Importantly, I demonstrate how the asymmetric equilibrium we observe in the market today can change systematically with the nature of competition between the retailers.
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