Digitalization and Ownership Structure of Private Copy Protection

The purpose of this paper is to analyze how digitalization affects pricing and private copy protection in contents industries. Digitalization enables content providers and online retailers to implement copy protection at different stages of creation and distribution of contents. We construct a model of vertical relationship where an upstream [a downstream] firm is considered as a content provider [a retailer]. Three different business models are proposed according to the ownership structure of copy protection determined the right to implement by a vertically-integrated entity, an upstream firm, and a downstream firm. In this setup we show that the results are dependent upon the degree of opportunistic behavior responding to increasing rival (piracy) costs under the different copy protection ownership. In addition, to address the change in demand side with digitalization we consider two different types of piracy differentiated by distribution channels (e.g., non-digital versus digital). We show that the effect of piracy on price and private copy protection depend critically on the nature of distribution channels and the dimension of differentiation between originals and pirated contents. In particular, strengthening IPR protection results in a price hike for the both cases, while we have opposite changes in quantities and the level of copy protection depending on different types of piracy