Digital Rights Management and the Pricing of Digital Products Yooki Park + and Suzanne Scotchmer* NBER Working paper 11532 (July 2005) revised August 2, 2006 Abstract: As it becomes cheaper to copy and share digital content, vendors are turning to technical protections such as encryption. We argue that if protection is nevertheless imperfect, this transition will generally lower the prices of content relative to perfect legal enforcement. However, the effect on prices depends on whether the content providers use independent protection standards or a shared one, and if shared, on the governance of the system. Even if a shared system permits content providers to set their prices independently, the equilibrium prices will depend on how the vendors share the costs, and prices may be higher than with perfect legal protection. We show that demand-based cost sharing generally leads to higher prices than revenue- based cost sharing. Users, vendors and the antitrust authorities will typically have different views on what capabilities the DRM system should have. We argue that, when a DRM system is implemented as an industry standard, there is a potential for “collusion through technology.” Keywords: technical protections, DRM, antitrust, trusted systems, cost sharing JEL Classifications: L13, L14, L15, K21, O33 We thank seminar and conference participants at U.C., Berkeley, Hitotsubashi Uni- versity, GRIP, IDEI (Toulouse), the NET Institute, University of Washington, U.S.C., CORE, ECARES, WEIS2005, ESAM06, Joan Feigenbaum, Filomena Garcia, Kazuharu Kiyono, Scott Shenker, and especially Emmanuel Farhi, who corrected an error and made many other useful comments. Financial support from the NET Institute (http://www.NETinst.org) is gratefully acknowledged. Dept. of Economics, U.C., Berkeley, CA 94720-3880, yooki @ berkeley.edu. *Dept. of Economics and GSPP, U.C., Berkeley, CA 94720-7320 and NBER. scotch @ berkeley.edu.