Digital Rights Management or Discard Restrictions on Music? DRM, Peer-To-Peer Piracy and the Pricing of Digital Music

Digital Rights Management (DRM) has been widely viewed by the music industry as an effective strategy for reducing digital piracy. DRM systems aim to prevent unauthorized copying and reduce the overall rate of piracy. Therefore, the recent move towards offering DRM-free music by some major online music sellers appears paradoxical. In this paper, the authors propose a model that conceptualizes and estimates the concept of hardcore piracy in an attempt to resolve this apparent paradox. The model results, based on two large empirical studies and one validation exercise with a large sample of over 2000 college students, indicate that the music industry can benefit from removing DRM because such a strategy has the potential to convert some pirates into paying consumers. In addition, a DRM-free environment enhances both consumer and producer welfare by increasing the demand for legitimate products as well as consumers ’ WTP for these products. The authors also find that producers could benefit by lowering prices from currently observed levels. The paper concludes by discussing the practical implications of the findings for managers within the music industry