Pricing under the Threat of Piracy: Flexibility and Platforms for Digital Goods

We consider the optimal design of flexible use in a digital-rights-management policy for a digital good subject to piracy. Consumers can acquire the digital good either as a licensed product or as an unlicensed copy. The ease of access to unlicensed copies is increasing in the flexibility accorded to licensed copies. The content provider has to trade off consumers’ valuation of a licensed copy against the sales lost to piracy.

We enrich the basic model by introducing a “secure platform” that is required to use the digital good. We show that the platform allows for the socially optimal provision of flexibility for the digital good but only if both are sold by an integrated firm.