Economic Analysis of Digital Rights Management for Software Updates

Abstract

This work presents an economic model that examines the roles of digital rights management (DRM) technologies with respect to software updates/patches. The analyses focus on the impact of pricing, piracy levels, and quality of pirated goods on the profit of the firm as well as the overall welfare of the economy. We utilize a two stage model where a monopoly firm first releases a base software product and then releases updates. The conclusions suggest that DRM protection decision for the updates is an effective strategy in such regimes where piracy rates are high, the quality of pirated software is low, or the base product is highly priced. We derive a threshold that defines the sufficient level of updates that provides enough incentives for pirates of the base product to eventually purchase the product. This threshold is independent of the piracy rate, but it increases if the pirated quality or pricing of the base increases. Furthermore, our analysis suggests that update DRM may actually decrease the overall social surplus but its use should also lead to the fairer allocation of the total surplus between consumers and firms. Finally, these findings shed light on the current and future firm practices and strategies.