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Optimal Digital Rights Management with Uncertain Piracy
Author(s) -
Sun Daewon,
Easley Robert,
Kim Byung Cho
Publication year - 2015
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/deci.12120
Subject(s) - digital rights management , dilemma , product (mathematics) , business , consumption (sociology) , face (sociological concept) , product line , computer science , microeconomics , control (management) , industrial organization , economics , computer security , engineering , manufacturing engineering , social science , philosophy , geometry , mathematics , epistemology , sociology , artificial intelligence
Many firms that sell digital copies of copyrighted materials online face a common dilemma: the use of digital rights management (DRM) to impede pirates can impose restrictions on legitimate use. We introduce a two‐period model in which the use of DRM in the first period affects the probability that a consumer finds a pirated copy in the second period; the threat of legal action reduces consumers’ consumption of pirated copies; and firms choose whether to sell, and at what prices, either strongly or weakly DRM‐protected products, or both. Furthermore, we incorporate the role of uncertainty concerning future levels of piracy. Using a two‐period model with uncertainty, we investigate a firm's optimal DRM strategies and present the optimal pricing strategy as well as product launch strategy under different market conditions. We find that one important characteristic of the optimal strategy is that it is optimal to maintain the same product line configuration strategy for both periods. We also characterize the conditions under which each strategy is optimal.