Firms' Optimal Digital Rights Management (DRM) Strategies: The Effects of Public Copy Protection and DRM Compatibility
The purpose of this paper is to investigate how different types of demand structure affect firms’ optimal pricing and private copy protection (DRM) level of digital products. We construct a model where the equilibrium prices and protection levels are dependent upon the two parameters: public copy protection of digital products and degree of compatibility of DRM in terms of hacking technology. We show that the optimal levels of DRM and prices are determined by different types of demand structure depending on the strategic interaction between the firms. As a result, the effects of an increase in public copy protection and less compatible hacking technology on the optimal levels of DRM, prices, quantity demanded, and profits have direct and indirect channels of which the latter is induced by the change of DRM. It is shown that total effects are dependent upon the demand structure and the strategic nature of DRM. The paper also discusses results of social welfare analysis.