Don't Think Twice, It's All Right: Music Piracy and Pricing in a DRM-Free Environment

Abstract

The music industry has widely viewed digital rights management (DRM) as an effective strategy for reducing digital piracy. Digital rights management systems aim to prevent unauthorized copying and to reduce the overall rate of piracy. Therefore, the recent move toward offering DRM-free music by some major online music sellers appears paradoxical. In this article, the authors propose a model that conceptualizes and estimates the concept of hardcore piracy in an attempt to resolve this apparent paradox. Based on two large empirical studies and a validation exercise with a large sample of more 2000 college students, the model results 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’ willingness to pay for these products. The authors find that producers could benefit by lowering prices from currently observed levels. The article concludes with a discussion of the practical implications of the findings for managers within the music industry.