Author(s)
Source
NBER working paper #11532, 2005
Summary
This paper looks at how using technology to protect copyright affects prices.
Policy Relevance
Using technology to protection copyright will tend to mean lower prices than using litigation. But having an industry standard for protection could allow cartels.
Main Points
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Digital rights management (DRM) technology uses encryption or watermarking to limit illegal copying of copyrighted works like music. Generally, this costs less than litigation as a means of protection, so more DRM means content prices will be lower.
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Content makers could each develop their own DRM system, or a standard system shared by all.
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Firms will likely set prices lower if it is easy for hackers to evade the DRM and make illegal copies. If each firm develops its own DRM, prices might rise because each system will attract less attention from hackers, so each firm has less reason to keep prices low.
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If firms share the cost of developing a DRM system, prices might be lower overall even if the firms form a cartel. Collusion is a possibility, because developing a shared system could make it harder for firms to price their products independently.
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Consumers benefit from a shared system only if the price is lower. But vendors benefit only if sharing reduces the cost of protection enough to balance the erosion of profits from lower prices. Vendors might choose separate systems even if sharing reduced their costs, because prices might be too low with a shared system.
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But consumers and content vendors might want the same thing in the end, because consumers don’t want vendor’s profits to fall so low they stop making new content.