Oestreicher-Singer and Sundararajan (2005)
|Oestreicher-Singer and Sundararajan (2005)|
|Title:||Are digital rights valuable? Theory and evidence from ebook pricing|
|Author(s):||Oestreicher-Singer, G., Sundararajan, S.|
|Citation:||Oestreicher-Singer, G., Sundararajan, S. (2005). Are digital rights valuable? Theory and evidence from ebook pricing. CeDER Working Paper No. 06-01. Available at SSRN 871243.|
|Link(s):||Definitive , Open Access|
|Key Related Studies:|
|About the Data|
|Data Description:||Over 3,000 ebook titles, across six categories, and sold by a specialized ebook retailer.|
|Data Type:||Primary data|
|Secondary Data Sources:|
|Data Collection Methods:|
|Data Analysis Methods:|
|Cross Country Study?:||No|
|Government or policy study?:||No|
|Time Period(s) of Collection:||
The effective management of digital rights is the central challenge in many industries making the transition from physical to digital products. We present a new model that characterizes the value of these digital rights when products are sold both embedded in tangible physical artifacts, and as pure digital goods, and when granting rights permitted by one's digital rights management (DRM) platform may affect the extent of digital piracy. Our model indicates that in the absence of piracy, digital rights should be unrestricted, since a seller can use its pricing strategy to optimally balance sales between physical and digital goods. However, the threat of piracy limits the extent to which digital rights should be granted: the value of digital rights is determined not only by their direct effect on the quality of legal digital goods, but by a differential piracy effect that can lower a seller's pricing power. When the latter effect is sufficiently high, granting digital rights can have a detrimental effect on value - our model indicates that this kind of effect is more likely to be observed for digital rights that aim to replicate the consumption experience of physical goods, rather than enhancing a customer's digital experience. We test the predictions of our analytical model using data from the ebook industry. Our empirical evidence supports our theoretical results, showing that four separate digital rights each have an economically significant impact on ebook prices, and establishing that the digital rights which aim to replicate physical consumption while increasing the threat of piracy are the ones that have negative impact on seller value. We also show that if the pricing of a digital good is keyed off that of an existing tangible good, optimal pricing changes for the former should be more nuanced, rather than simply mirroring changes in the price of the latter, and we discuss the effect of the technological sophistication of potential customers on optimal pricing and rights management. Our results represent new evidence of the importance of an informed and judicious choice of the different digital rights granted by a DRM platform, and provide a new framework for guiding managers in industries that are progressively being digitized.
Main Results of the Study
- In the absence of a piracy threat, digital rights are always valuable through their direct effect on increasing the quality of digital goods. Any issues of cannibalization of the sales of physical goods can be effectively addressed by a strategic choice of pricing.
- When granting digital rights in the presence of digital piracy, the value of these rights is governed by two opposing effects: a direct quality effect, or how much the granting of the right increases willingness to pay for the legal digital goods, and a differential piracy effect, that measures how much it reduces the relative surplus of consuming legal tangible and digital goods through its inducing digital piracy.
- Each of four separate digital rights have both a statistically and economically significant impact on ebook prices, after controlling for tangible book price levels and category.
- The variation in ebook prices we observe across categories suggests that an increase in technological sophistication of consumers is associated with an increase in the price of legal digital goods.
Policy Implications as Stated By Author
A model of the simultaneous choice of tangible and digital pricing in the presence of piracy would be a useful extension, especially as digital goods gain prominence in more industries.
Coverage of Study
|Level of aggregation:||ebooks|
|Period of material under study:||2005|