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Times New RomanSymbolArialDefault DesignMicrosoft Equation 3.0CorelEquation 11 Equation>Digital Rights Management and the Pricing of Digital ProductsOutline of TalkSlide 3Outline of TalkAMonopoly: the price-reducing effect of a threat of circumventionWelfare Implications of DRMOutline of TalkPricing with DRM2The General Monotone Comparative Statics ArgumentBOligopoly: the price-reducing effect of a threat of circumventionOutline of Talk<Will vendors make the optimal choice whether to share? (no)Outline of TalkDCost Sharing and Independent Pricing Must pricing be collusive, pJ?Revenue-based cost sharingDemand-based cost sharing`Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?Comparative statics argument mPure effects of cost sharing: Effect of K (protection cost) on the equilibrium prices (assuming no hacking)<Why might cost-sharing not support the collusive prices pJ?Collusion through TechnologyFonts UsedDesign TemplateEmbedded OLE Servers
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?%Z'=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(A Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?ZZ 0Z2l0Z0Z-0Z-$( k 8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/
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?%z'=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(A Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?PP 0Pl0PP0P(,$$ k$ ^8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/%CCost Sharing and Independent PricingMust pricing be collusive, pJ?2D@(@With independent pricing, equilibrium prices depend on how costs are shared:
Cost-sharing schemes:
(1) Fixed cost shares
(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8L The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
Then at pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
RLZZ~:~Collusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)^$Zb0Z-60Z2$0Z-Z$"m
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Cost-sharing schemes:
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(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8L The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
Then at pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
RLZZ~:~Collusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)^$Zb0Z-60Z2$0Z-Z$"m
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?%d'=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(A Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?ZZ 0Z2l0Z0Z-0Z- $ k 8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/%CCost Sharing and Independent PricingMust pricing be collusive, pJ?2D@(@With independent pricing, equilibrium prices depend on how costs are shared:
Cost-sharing schemes:
(1) Fixed cost shares
(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8L The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
Then at pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
RLZZ~:~Collusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)^$Zb0Z-60Z2$0Z-Z$"m
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2$U@
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?%m'=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(A Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?ZZ 0Z2l0Z0Z-0Z- $ k 8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/%CCost Sharing and Independent PricingMust pricing be collusive, pJ?2D@(@With independent pricing, equilibrium prices depend on how costs are shared:
Cost-sharing schemes:
(1) Fixed cost shares
(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8G The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
At pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
NGy:,vCollusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)^$Zb0Z-60Z2$0Z-Z$"
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2$U@
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?%'=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(bA Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?
We consider a wholly owned subsidiary.PP 0P2l0P0P-0P- $ k &8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/%CCost Sharing and Independent PricingMust pricing be collusive, pJ?2D@(@With independent pricing, equilibrium prices depend on how costs are shared:
Cost-sharing schemes:
(1) Fixed cost shares
(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8G The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
At pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
NGy:yCollusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)^$Zb0Z-60Z2$0Z-Z$"m
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?%(=Digital Rights Management and the Pricing of Digital ProductsuYooki Park
and
Suzanne Scotchmer
Workshop on the Economics of Information Security
KSG, Cambridge, MA
June 2, 2005*vPU V!Outline of TalkDRM: A circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHZ#q :#q"(bA Circumvention Hypothesis:
DRM sets the cost of circumvention
(but does not protect in any absolute sense)
Mass circumvention (internet) is detectable, avoidable.
The conceit in this paper:
Content will eventually be given away for free (unprotected) but the ability to render it is protected.
Business Models:
Who sells the ability to render, and what is the relationship with the content provider? Third party? Self? How is the cost of protection covered, and how does it relate to payments for content?
We consider a wholly owned subsidiary.PP 0P2l0P0P-0P- $ k 8!Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyTU#q:q(@Monopoly: the price-reducing effect of a threat of circumventionAA Welfare Implications of DRM
DRM might increase profit and consumer welfare.
Protection may last longer, but DRM is costly.
With equal total revenue, less DWL:
PZ20ZPVZi9"Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyHU#qUq@$Pricing with DRMComparisonsG%1The General Monotone Comparative Statics Argument22(!
A#AOligopoly: the price-reducing effect of a threat of circumventionBB I&Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through Technology
HU#rU#/CK(;Will vendors make the optimal choice whether to share? (no)<<(6The private versus the public interest:
Reducing costs of protection is good for everyone.
(But sharing might not reduce costs.)
Vendors want to raise price, while it is (possibly) in the public interest to lower price.
Because of this conflict, vendors will not make the optimal choice whether to share. l( <4 2'
7*$j8_J'Outline of TalkA circumvention hypothesis
The price-moderating effect of the circumvention threat:
The Monopoly Case
The Duopoly Case
Will vendors make the optimal choice to share?
Cost-Sharing and Independent Pricing
Collusion through TechnologyRU#qU#/%CCost Sharing and Independent PricingMust pricing be collusive, pJ?2D@(@With independent pricing, equilibrium prices depend on how costs are shared:
Cost-sharing schemes:
(1) Fixed cost shares
(2) Revenue-based cost shares;
firms set prices; revenue can be monitored.
(3) Demand-based cost shares;
firms set prices; total revenue is not monitored.:M P MRevenue-based cost sharing$Revenue share of firm 1:
Why does the pursuit of profit generally break collusion?
A price reduction increases the firm s revenue by stealing business from the rival.
But with cost sharing, the increase in revenue (generally) also increases the cost share .
Revenue-based cost sharing can be collusive, despite independence in price setting.zP<0P(U0P(0Pd
<U\TDemand-based cost sharing(& .Makes collusion even harder to sustain.
A reduction in price increases the cost share even more than with revenue-based cost sharing
Firms will prefer demand-based cost sharing to revenue-based cost sharing.$ FK _,_Pure effects of cost sharing (given K): Does higher K (protection cost) lead to higher prices?`)(7 TCompare: (1) demand-based cost sharing with (2) fixed cost shares and (3) revenue-based cost sharing
Monotone comparative statics:
But what happens when the no-hacking constraint is imposed? Constrain prices at pJ ?
Notice that higher prices require higher protection
Protection can be used to constrain prices downward but not upward.Z Z4 0Z-E!Z},zU}T+Comparative statics argument `-lPure effects of cost sharing: Effect of K (protection cost) on the equilibriumprices (assuming no hacking)m(N a.;Why might cost-sharing not support the collusive prices pJ?L<((((
((8G The most interesting case is when the collusive price is above the price sustainable with perfect legal enforcement.
At pJ a reduction in price increases revenue.
A reduction in price increases the cost share.
Which dominates?
The level of protection sets of price cap but the firms might find an equilibrium at lower prices.
NGy:yCollusion through TechnologyCompetitive objective is unclear:
Demand-based cost-sharing is best for collusion. (Constrain prices through the protection level.)
Technology determines whether collusion is possible.
(1) DRM to enforce a single price?
(2) Create a veil that allows demand (downloads) to be
monitored, but not revenue?
(4) Distribute content for zero price, pay for rendering.
(5) Privacy concerns?
(Keep the download records out of the hands of the
DRM subsidiary?)
Would not want to overcome a single monopoly price by
allowing rebates on the side/
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