Managing piracy: Dual-channel strategy for digital contents

Yan-Xin Chai; Steven Ji-Fan Ren; Jian-Qiang Zhang

doi:10.3934/jimo.2021100

Article Contents

2022, Volume 18, Issue 4: 3001-3027. Doi: 10.3934/jimo.2021100

This issue Previous Article A novel quality prediction method based on feature selection considering high dimensional product quality data Next Article

Managing piracy: Dual-channel strategy for digital contents

1.
School of Economics and Management, Harbin Institute of Technology, Shenzhen, Shenzhen, 518055, China
2.
School of Business, Jiangsu Normal University, Xuzhou, 221116, China

^* Corresponding authors: renjifan@hit.edu.cn; jqzhang@jsnu.edu.cn
^* Corresponding authors: renjifan@hit.edu.cn; jqzhang@jsnu.edu.cn

Received: July 31, 2020

Revised: February 28, 2021

Published: July 2022

Abstract Full Text(HTML) Figure(3) / Table(5) Related Papers Cited by

Abstract

The Internet offers digital content disc producers the opportunities to design dual channels by introducing an online-direct store alongside traditional retail stores, but also leads related firms to suffer significant piracy problems. Using a game-theoretic framework, we explore dual-channel marketing optimality as a piracy-mitigating strategy for digital content sold in the physical disc format. We construct a price-setting game between a digital content producer and its independent retailer(s) in a pirated market by endogenizing the producer's copyright protection investments. We show that dual-channel marketing, a complement or a substitute for conventional copyright protection, can strategically mitigate the piracy level by increasing the equal-size retail sales volume. We also investigate how firms' pricing strategies and profits are influenced by the endogenous interaction of dual-channel marketing and copyright protection. We unexpectedly find that in a pirated market with insufficient copyright protection, dual-channel marketing can simultaneously raise firm pricing and sales volumes when the producer sells through a monopolistic retailer. We also identify the conditions under which dual-channel marketing can mitigate profit losses caused by piracy for the producer and the retailer(s). Unlike previous research which shows that dual-channel marketing benefits the producer and the monopolistic retailer because it mitigates double marginalization, in the pirated market, this win-win outcome occurs even if accompanied by aggravated double marginalization. Moreover, dual-channel marketing can mitigate all the firms' profit losses caused by piracy only when it can complement conventional copyright protection, i.e., when the producer sells through a monopolistic retailer or duopolistic retailers. In each situation, counter-intuitively, as copyright protection becomes increasingly costly, although the retailer(s) is (are) more willing to accept dual-channel marketing, the producer has a decreased incentive to design such sales channels.

Keywords:

Mathematics Subject Classification: Primary: 58F15, 58F17; Secondary: 53C35.

Citation:

FullText(HTML)

Figure 1. In the pirated market, the influences of dual-channel marketing on the wholesale price, retail price and retail profit margin, respectively

Download: Full-size image PowerPoint slide

Figure 2. The win-win region by the online-direct channel's introduction in the pirated market

Download: Full-size image PowerPoint slide

Figure 3. The win-win regions by the online-direct channel's introduction in the pirated market when and $ n = 1 $, $ n = 2 $, respectively

Download: Full-size image PowerPoint slide

Table 1. Equilibrium outcomes in the benchmark without piracy where the producer sells discs through the traditional channel and dual channels, respectively

	Traditional channel	Dual channels
Price
Wholesale price, $ {w^b} $	$ \frac{1}{2} $	$ \frac{\theta }{2} $
Online-direct price, $ p_M^b $	_	$ \frac{\theta }{2} $
Retail price, $ p_R^b $
Demand	$ \frac{3}{4} $	$ \frac{1}{2} $
Online-direct demand, $ q_M^b $	_	0
Retail demand, $ q_R^b $	$ \frac{1}{4} $	$ \frac{1}{2} $
Total demand, $ q_M^b + q_R^b $	$ \frac{1}{4} $	$ \frac{1}{2} $
Profit
Producer profit, $ \pi _M^b $	$ \frac{1}{8} $	$ \frac{\theta }{4} $
Retailer profit, $ \pi _R^b $	$ \frac{1}{{16}} $	$ \frac{{1 - \theta }}{4} $

| Show Table

DownLoad: CSV

Table 2. Equilibrium outcomes in the pirated market when the producer sells discs through the traditional channel

	$ c \in (0,\frac{1}{8}] $	$ c \in (\frac{1}{8},\infty ) $
Copyright protection level, $ {e^T} $	1	$ \frac{1}{{8c}} $
Price
Wholesale price, $ {w^T} $	$ \frac{1}{2} $	$ \frac{1}{{16c}} $
Retail price, $ p_R^T $	$ \frac{3}{4} $	$ \frac{3}{{32c}} $
Demand
Retail (Licensed) demand, $ q_{R(L)}^T $	$ \frac{1}{4} $	$ \frac{1}{4} $
Piracy demand, $ q_P^T $	$ \frac{3}{4} $	$ \frac{3}{4} $
Profit
Producer profit, $ \pi _M^T $	$ \frac{{1 - 4c}}{8} $	$ \frac{1}{{128c}} $
Retail profit, $ \pi _R^T $	$ \frac{1}{{16}} $	$ \frac{1}{{64c}} $

| Show Table

DownLoad: CSV

Table 3. Equilibrium outcomes in the pirated market when the producer sells discs through dual channels

	$ c \in (0,\frac{1}{4}] $	$ c \in (\frac{1}{4},\infty ) $
Copyright protection level, $ {e^D} $	1	$ \frac{1}{{4c}} $
Price
Wholesale price, $ {w^D} $	$ \frac{\theta }{2} $	$ \frac{{1 - 4c(1 - \theta )}}{{8c}} $
Online-direct price, $ p_M^D $	$ \frac{\theta }{2} $	$ \frac{{1 - 4c(1 - \theta )}}{{8c}} $
Retail price, $ p_R^D $	$ \frac{1}{2} $	$ \frac{1}{{8c}} $
Demand
Online-direct demand, $ q_M^D $	0	0
Retail demand, $ q_R^D $	$ \frac{1}{2} $	$ \frac{1}{2} $
Licensed demand, $ q_L^D $	$ \frac{1}{2} $	$ \frac{1}{2} $
Piracy demand, $ q_P^D $	$ \frac{1}{2} $	$ \frac{1}{2} $
Profit
Producer profit, $ \pi _M^D $	$ \frac{{\theta - 2c}}{4} $	$ \frac{{1 - 8c(1 - \theta )}}{{32c}} $
Retail profit, $ \pi _R^D $	$ \frac{{1 - \theta }}{4} $	$ \frac{{1 - \theta }}{4} $

| Show Table

DownLoad: CSV

Table 4. Equilibrium outcomes in the pirated market when the producer sells discs through traditional retailers

	$ c \in (0,\frac{n}{{4(1 + n)}}] $	$ c \in (\frac{n}{{4(1 + n)}},\infty ) $
Copyright protection level, $ {e^{nT}} $	1	$ \frac{n}{{4(1 + n)c}} $
Price
Wholesale price, $ {w^{nT}} $	$ \frac{1}{2} $	$ \frac{n}{{8(1 + n)c}} $
Retail price, $ p_R^{nT} $	$ \frac{{2 + n}}{{2(1 + n)}} $	$ \frac{{{n^2} + 2n}}{{8{{(1 + n)}^2}c}} $
Demand
Retail $ i $'s demand, $ Q_i^{nT} $	$ \frac{1}{{2(1 + n)}} $	$ \frac{1}{{2(1 + n)}} $
Licensed demand, $ Q_R^{nT} $	$ \frac{n}{{2(1 + n)}} $	$ \frac{n}{{2(1 + n)}} $
Piracy demand, $ Q_P^{nT} $	$ \frac{{n + 2}}{{2(1 + n)}} $	$ \frac{{n + 2}}{{2(1 + n)}} $
Profit
Producer profit, $ \pi _M^{nT} $	$ \frac{{n - 2(1 + n)c}}{{4(1 + n)}} $	$ \frac{{{n^2}}}{{32{{(1 + n)}^2}c}} $
Retail profit, $ \pi _R^{nT} $	$ \frac{1}{{4{{(1 + n)}^2}}} $	$ \frac{1}{{16{{(1 + n)}^3}c}} $

| Show Table

DownLoad: CSV

Table 5. Equilibrium outcomes in the pirated market when the producer sells discs through traditional retailers and an online-direct channel

	$ c \in (0,\frac{n}{{{{(1 + n)}^2}}}] $	$ c \in (\frac{n}{{{{(1 + n)}^2}}},\infty ) $
Copyright protection level, $ {e^{nD}} $	1	$ \frac{n}{{{{(1 + n)}^2}c}} $
Price
Wholesale price, $ {w^{nD}} $	$ \frac{\theta }{{1 + n}} $	$ \frac{{n - (1 - \theta ){{(1 + n)}^2}c}}{{{{(1 + n)}^3}c}} $
Online-direct price, $ p_M^{nD} $	$ \frac{\theta }{{1 + n}} $	$ \frac{{n - (1 - \theta ){{(1 + n)}^2}c}}{{{{(1 + n)}^3}c}} $
Retail price, $ p_R^{nD} $	$ \frac{1}{{1 + n}} $	$ \frac{n}{{{{(1 + n)}^3}c}} $
Demand
Online-direct demand, $ Q_M^{nD} $	0	0
Retail $ i $'s demand, $ Q_i^{nD} $	$ \frac{1}{{1 + n}} $	$ \frac{1}{{1 + n}} $
Licensed demand, $ Q_L^{nD} $	$ \frac{n}{{1 + n}} $	$ \frac{n}{{1 + n}} $
Piracy demand, $ Q_P^{nD} $	$ \frac{1}{{1 + n}} $	$ \frac{1}{{1 + n}} $
Profit
Producer profit, $ \pi _M^{nD} $	$ \frac{{2n\theta - {{(1 + n)}^2}c}}{{2{{(1 + n)}^2}}} $	$ \frac{{{n^2} - 2(1 - \theta ){{(1 + n)}^2}cn}}{{2{{(1 + n)}^4}c}} $
Retail profit, $ \pi _R^{nD} $	$ \frac{{1 - \theta }}{{{{(1 + n)}^2}}} $	$ \frac{{1 - \theta }}{{{{(1 + n)}^2}}} $

| Show Table

DownLoad: CSV

Related Papers

Cited by

References

[1]	I. Ahn and I. Shin, On the optimal level of protection in DRM, Information Economics and Policy, 22 (2010), 341-353. doi: 10.1016/j.infoecopol.2010.09.003.
[2]	A. Arya, B. Mittendorf and D. E. M. Sappington, The bright side of supplier encroachment, Marketing Science, 26 (2007), 651-659. doi: 10.1287/mksc.1070.0280.
[3]	T. Avinadav, T. Chernonog and Y. Perlman, Analysis of protection and pricing strategies for digital productsunder uncertain demand, International Journal of Production Economics, 158 (2014), 54-64. doi: 10.1016/j.ijpe.2014.07.021.
[4]	S. H. Bae and J. P. Choi, A model of piracy, Information Economics and Policy, 18 (2006), 303-320. doi: 10.1016/j.infoecopol.2006.02.002.
[5]	K. Cattani, W. Gilland, H. S. Heese and J. Swaminathan, Boiling frogs: Pricing strategies for a manufacturer adding a directchannel that competes with the traditional channel, Production and Operations Management, 15 (2006), 40-56. doi: 10.1111/j.1937-5956.2006.tb00002.x.
[6]	R. K. Chellappa and S. Shivendu, Managing piracy: Pricing and sampling strategies for digital experience goods in vertically segmented markets, Information Systems Research, 16 (2005), 400-417. doi: 10.1287/isre.1050.0069.
[7]	W.-Y. K. Chiang, D. Chhajed and J. D. Hess, Direct marketing, indirect profits: A strategic analysis of dual-channel supply-chain design, Management Science, 49 (2003), 1-20. doi: 10.1287/mnsc.49.1.1.12749.
[8]	P. Choi, S. H. Bae and J. Jun, Digital piracy and firms' strategic interactions: The effects ofpublic copy protection and DRM similarity, Information Economics and Policy, 22 (2010), 354-364. doi: 10.1016/j.infoecopol.2010.10.001.
[9]	B. Fritz, Sales of digital movies surge, 2014. Available from: https://www.wsj.com/articles/SB10001424052702304887104579306440621142958.
[10]	R. D. Gopal and A. Gupta, Trading higher software piracy for higher profits: The case ofphantom piracy, Management Science, 56 (2010), 1946-1962. doi: 10.1109/HICSS.2002.994188.
[11]	L. Guo and X. Meng, Digital content provision and optimal copyright protection, Management Science, 61 (2015), 1183-1196. doi: 10.1287/mnsc.2014.1972.
[12]	D. Hayes, Six reasons why dvds still make money – and won't die anytime soon, 2014. Available from: https://www.forbes.com/sites/dadehayes/2013/07/08/six-reasons-why-dvds-still-make-money-and-wont-die-anytime-soon/.
[13]	Y.-S. Huang, S.-H. Lin and C.-C. Fang, Pricing and coordination with consideration of piracy for digitalgoods in supply chains, Journal of Business Research, 77 (2017), 30-40. doi: 10.1016/j.jbusres.2017.03.023.
[14]	J. Jaisingh, Piracy on file-sharing networks: Strategies for recording companies, Journal of Organizational Computing and Electronic Commerce, 17 (2007), 329-348. doi: 10.1080/10919390701636239.
[15]	J. J. Kacen, J. D. Hess and W.-Y. K. Chiang, Bricks or clicks? Consumer attitudes toward traditional stores andonline stores, Global Economics and Management Review, 18 (2013), 12-21. doi: 10.1016/s2340-1540(13)70003-3.
[16]	A. Kim, A. Lahiri and D. Dey, The 'invisible hand' of piracy: An economic analysis of the information-goods supply chain, MIS Quarterly, 42 (2018), 1117–1141. doi: 10.2139/ssrn.2426577.
[17]	D. M. Kreps and J. A. Scheinkman, Quantity precommitment and bertrand competition yield cournot outcomes, The Bell Journal of Economics, 14 (1983), 326-337. doi: 10.2307/3003636.
[18]	A. Lahiri and D. Dey, Effects of piracy on quality of information goods, Management Science, 59 (2013), 245-264. doi: 10.1287/mnsc.1120.1578.
[19]	T.-P. Liang and J.-S. Huang, An empirical study on consumer acceptance of products in electronic markets: A transaction cost model, Decision Support Systems, 24 (1998), 29-43. doi: 10.1016/S0167-9236(98)00061-X.
[20]	E. Priest, The future of music and film piracy in china, Berkeley Technology Law Journal, 21 (2006), 795.
[21]	RIAA, 2008 Year-End Shipment Statistics, 2009. Retrieved September 9, 2011.
[22]	M. D. Smith and R. Telang, Piracy or promotion? The impact of broadband internet penetration on DVD sales, Information Economics and Policy, 22 (2010), 289-298. doi: 10.1016/j.infoecopol.2010.02.001.
[23]	A. Sundararajan, Managing digital piracy: Pricing and protection, Information Systems Research, 15 (2004), 287-308. doi: 10.1287/isre.1040.0030.
[24]	A. A. Tsay and N. Agrawal, Channel conflict and coordination in the e-commerce age, Production and Operations Management, 13 (2009), 93-110. doi: 10.1111/j.1937-5956.2004.tb00147.x.
[25]	H. R. Varian, Versioning Information Goods, Working paper, University of California in Berkeley, 1997.
[26]	D. A. Vernik, D. Purohit and P. S. Desai, Music downloads and the flip side of digital rights management, Marketing Science, 30 (2011), 1011-1027. doi: 10.1287/mksc.1110.0668.
[27]	S.-Y. Wu and P.-Y. Chen, Versioning and piracy control for digital information goods, Operations Research, 56 (2008), 157-172. doi: 10.1287/opre.1070.0414.