Consumer Search and Retailer Strategies in the Presence of Online Music Sharing

Advances in online technologies and bandwidth availability have opened new vistas for online distribution of digital goods. But potential benefits for consumers are juxtaposed against challenges for retailers of such goods. Here we investigate one type of digital experience good - music - whose market environment includes the very real presence of online piracy options. While arguments abound for and against online distribution of such digital goods, little research exists in this area. We develop a model of consumer search for such an experience good, and study five different emerging market environments for retailers (from a traditional brick and mortar retailer to an online retailer) where consumers have opportunities of pirating from illegal networks. Retailer cost to publishers is modeled using a variety of licensing schema. Results from a survey we conducted, together with data from online sharing networks, are utilized to investigate the validity of a key assumption. Finally, computational analysis is used to develop insights related to conditions that cannot be solved for analytically. We find that online selling strategies for a traditional retailer can provide additional profits even in the face of existing piracy options. Our results indicate that decreasing piracy is not necessarily equivalent to increasing profit. We show that leading strategies for business in such goods should include the use of pricing options, provision of efficient search tools to consumers and new approaches to licensing structures with digital good publishers