Digital Rights Management and Hardware Market Power

41 Pages Posted: 23 Jan 2017  

Jin-Hyuk Kim

University of Colorado at Boulder

Michael Waldman

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: December 31, 2016

Abstract

Digital Rights Management (DRM) is employed by firms as a way of reducing illegal copying. In this paper we investigate the idea that it can also be associated with an increase in market power in the hardware market. In our main analysis content and hardware are complementary goods, where there are multiple hardware sellers and one of the hardware sellers owns a DRM technology that can be developed into a DRM system that makes legal content incompatible with hardware that does not employ the system. Our primary result is that the hardware producer who initially owns the DRM technology may employ closed DRM to gain market power in the hardware market because this is an efficient way to monetize its initial ownership of the technology. We also show that, depending on whether or not the content developer has positive bargaining power, the introduction of DRM may or may not result in an increase in content development. In addition to investigating these ideas in a number of related theoretical settings, we also consider the social welfare aspects of the argument and discuss its relevance for understanding the early history of Apple's iPod.

Suggested Citation

Kim, Jin-Hyuk and Waldman, Michael, Digital Rights Management and Hardware Market Power (December 31, 2016). Review of Economic Research on Copyright Issues, 2016, 13(2), 25-65. Available at SSRN: https://ssrn.com/abstract=2903417

Jin-Hyuk Kim (Contact Author)

University of Colorado at Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States

Michael Waldman

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-8631 (Phone)

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