Oestreicher-Singer and Sundararajan (2010)
|Oestreicher-Singer and Sundararajan (2010)|
|Title:||Are digital rights valuable? Theory and evidence from ebook pricing|
|Author(s):||Oestreicher-Singer, G., Sundararajan, A.|
|Citation:||Oestreicher-Singer, G., & Sundararajan, A. (2010). Are digital rights valuable? Theory and evidence from ebook pricing.|
|Key Related Studies:|
|About the Data|
|Data Description:||A data set containing pricing and digital rights data for 32,092 ebook titles, across 55 categories, sold by a specialized web-based ebook retailer. This data set is combined with another containing similar information for the paperback equivalents of the ebooks from a leading online seller of physical books. The authors do not state which retailers provided the data, or which territories the data applies to. They also did not state who funded the research.|
|Data Type:||Secondary data|
|Secondary Data Sources:|
|Data Collection Methods:|
|Data Analysis Methods:|
|Cross Country Study?:||Yes|
|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
The main results reported by 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, which measures how much the digital right reduces the relative surplus of consuming legal tangible and digital goods through inducing digital piracy.
- When the direct quality effect balances the differential piracy effect, then granting the right is beneficial to the seller. It raises prices and products from the sales of digital goods. This effect is more likely to be associated with rights that enhance the digital consumption experience of the good, rather than replicate the physical consumption experience, since consumers who purchase the digital good belong to the segment who value digital quality. If they valued the physical consumption experience, these consumers would have purchased the tangible good in the first place.
- When the differential quality effect associated with a digital right exceeds the direct quality effect significantly, granting the right may affect the sellers pricing power adversely, since consumers who prefer digital goods over tangible goods need to be offered sufficient surplus to ensure that they do not simply resort to using a pirated copy of the good. This kind of right is generally likely to be one that attempts to replicate the physical consumption experience digitally.
- In testing the theory’s predictions using pricing and digital rights data for over 30,000 ebooks, each of four digital rights has both a statistically and economically significant impact on ebook prices, after controlling for tangible book price levels, sales rank and category.
- Results also show that a right that aims to replicate physical consumption characteristics (printing) has a negative impact on ebook prices, while rights enhancing the consumption experience by exploiting the fact that the book is now a digital good (copying) have a positive impact on prices.
- The variation in ebook prices observed 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
Policy implications reported in the study:
- The authors presented a model characterizing the choice of digital rights and pricing for digital goods offered by a firm that also sells a tangible version of the digital good, the granting of digital rights for which may also lead to an increase in digital piracy. The predictions of this model are validated by empirical results, and suggest important new guidelines for managers in industries that are progressively being digitized.
- As the pace of industry transformation by information technology accelerates over the coming years, managing such transitions will become central to continued business success across a wider variety of industries, thereby increasing the value of research that contributes to understanding of the transformational power of IT, and of how the Internet affects markets and industry structure.
- Conversations with publishers have suggested they still price the tangible book independently, and then key the ebook price of this. However, 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.
- While most digital goods in other industries do not currently have the rich variation in rights across products that made our empirical study of ebook pricing viable, they are likely to in the near future, and may present the opportunity for studies similar to ours across other industries like music and broadcast video. There are also indications that new forms of pricing are forthcoming in the ebook industry, most notably pay-per-use pricing from Google.
Coverage of Study
|Level of aggregation:||Books|
|Period of material under study:||2009|