Analysis of protection and pricing strategies for digital products under uncertain demand

We analyze pricing and protection (digital rights management) strategies in a two-echelon supply chain that consists of a manufacturer and a retailer of digital products. The demand for the legal (non-pirated) product, which depends on both price and monetary investment in protection, is assumed to be uncertain. Three different supply chain models are analyzed: manufacturer Stackelberg, retailer Stackelberg and vertical integration. We show that the retailer׳s utility function has no effect on the equilibrium strategies, and suggest schemes to find these strategies for any utility function of the manufacturer. Further results are obtained under assumptions of either a multiplicative or an additive demand model. We study the players׳ strategies under different profit criteria reflecting different attitudes toward risk—specifically, the Expectation criterion and the Target criterion—and, for each criterion, we obtain the dependence between the pricing and the protection investment. We show that there are situations in which the manufacturer can increase his profit by giving up his leadership to the retailer, even if the power balance is in his favor.