Piracy on file-sharing networks: Strategies for recording companies

In this article, we study the impact on piracy of selling music as downloadable files and the strategies that recording companies should adopt to increase profits. We find that total music sales and profits of firm (recording company) are higher, and total piracy (demand on file-sharing networks) is lower when the firm sells a downloadable version of a music track. We also look at the firm's optimal level of digital rights management (DRM) protection. We found that revenue decreases with increased protection. It is therefore optimal for the firm not to employ any DRM protection in the absence of network externality (NE). Listening to music or watching videos protected by DRM is cumbersome to users because they have to download license files and there are restrictions on the number of times the file can be copied and on the type of devices that can play the file. As a result, DRM protection is a disutility to the legal consumer and the firm must charge lower prices with more DRM protection. When NE is high and a nominal search cost is above a certain threshold, then non-zero protection becomes optimal.