Competition among originals, managed originals and illegal copies and social welfare

Abstract

DRM(Digital Rights Management) refers to access control technologies for copyright holders to limit usage of digital contents or devices and to prevent the unauthorized use of them. We consider an information good market in which DRM-free originals(simply, originals), originals controlled by DRM(simply, managed originals) and illegal copies are traded. We model a monopolistic copyright holder's behavior of setting the prices of an original and a managed original as well as of determining the protection level of DRM in this market, and identify and analyze the market equilibrium. We also study the welfare effect of the introduction of managed originals into the market. In the equilibrium, the copyright holder selects a protection level of DRM which equates the quality of a managed original and that of an illegal copy, and sets the price of a managed original to be equal to the unit copy cost. The introduction of managed originals into the market raises the price of an original. If the copy cost is relatively low, the introduction of managed originals enhances the social welfare. Otherwise, it reduces the social welfare.