The Economics of Digital Goods: Selling vs. Renting Music Online

DIME Intellectual Property Rights Working Paper No. 13

46 Pages Posted: 1 Apr 2009 Last revised: 29 Jul 2014

See all articles by Thierry Rayna

Thierry Rayna

École Polytechnique, i3-CRG, UMR CNRS 9217

Date Written: May 1, 2006

Abstract

This article explains how DRM helped Apple gain market leadership, why Microsoft departed from its usual "software-only" strategy and dropped PlayForSure (and its partners) to launch Zune, why Sony, the historical market leader, failed where Apple succeeded while using the same strategy and, finally, why Napster and iTunes are not competing directly.

Using the premise that digital technology has made music an infinitely durable product, this article analyses the market of online music. Whereas the literature states that, in an oligopoly, selling a durable good is the dominant strategy, it is demonstrated that, in this particular industry, renting is the best strategy. This is because because of the consumer switching costs that renting generates. However, for firms, such as Apple, Sony or Microsoft who supply a complementary non-durable good (iPod, Windows, etc.), selling remains the best strategy, as they are already protected by switching costs.

Furthermore, this article shows that even in a monopoly situation, selling the music is the best strategy, as it creates a loop of self-reinforcing switching costs between the durable (music) and the non-durable (iPod, etc.) complement.

Finally, this article assesses, theoretically and empirically, the performance of both renting and selling strategies in regard to piracy. Taking into account the subjective durability of music for consumers, it is demonstrated that piracy inverses the Coase results related to durability: it is better to rent to consumers for whom music is not very durable and to sell to consumers for whom it is very durable.

Keywords: Durable goods, Coase conjecture, Online music, Piracy, Competition, Oligopoly, Switching Costs, Digital Rights Management, Intellectual Property Rights, Apple, Sony, Microsoft, Napster, iPod

Suggested Citation

Rayna, Thierry, The Economics of Digital Goods: Selling vs. Renting Music Online (May 1, 2006). DIME Intellectual Property Rights Working Paper No. 13, Available at SSRN: https://ssrn.com/abstract=1371097 or http://dx.doi.org/10.2139/ssrn.1371097

Thierry Rayna (Contact Author)

École Polytechnique, i3-CRG, UMR CNRS 9217 ( email )

828 boulevard Marshals
Paris, 91762
France

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