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A Model on Consumer Behavior and the Demand for Secured Digital

ContentRollins College, USA

Prof. Dr. Marc Fetscherin

March 2006

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Agenda

• Need for a Model• Assumptions• Basic Model• Extended Model• Demand for Digital Content• Conclusion

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Would you prefer a music download...

• which you can copy unlimited times or only 3 times?

• which you can burn on a CD or not?• which you can use on your PC and MP3 player or

only on your PC/MP3 player• for acquire for free or to pay

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Need for a Model

• Many papers looked at Software piracy, some on music

• Few papers looked on the consumer trade-off between purchasing or copying music

• Non looked on the effects of technology restrictions of digital content on the consumer behavior

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Assumptions

• Three options for consumer• Purchase• Copy• No consumption

• Original = copy • Consumer maximise utility• One price• Access, search, storage costs

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Basic Model

• x1 and x2 number purchases or copies• mi budget for consumer i spend on music• p1 price for original, p2 of copy lim -> 0

• v1 and v2 perceived utility or value by consumer

• Budget constraint: mi = p1x1 + p2x2

• Utility function: U(x1, x2) = vx1 x1 + vx2 x2

• Net benefit to purchase: vx1 - p1

• Net benefit to copy: vx2 - p2

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Extended Model

• Economical Factors• Risk Factors• Technology Factors

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Economical Factors

• Quality perception• Anti-P2P companies• Virus• Lack metadata, poor file compression

• q [0 : 1] reducing utility of copy vx1(1 - q) x2

• Utility function: U (x1, x2) = vx1 x1 + vx1(1 - q) x2

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Risk Factors

• Copying copyrighted music is illegal• u probability being caught in specific country, u [0 :

1] • Digital Rights Management Systems

• Detect and track copyrighted material• DRM increases chances being detected (watermarking,

fingerprint)• m increased probability being caught when copying, m

[0 : 1] • When detected, paying a fine f• Overall probability being caught:

fuz um)1(

• New budget line: mi = p1x1 + z

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Technology Factors

• Digital Rights Management manage rights, but also restricts users in usage

• This might affect the utility of the original, d [0 : 1] byvx1 (1 - d)x1

• Utility function: U (x1, x2) = vx1 (1 – d) x1 + vx1(1 -

q) x2

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Demand for Digital Content

• Assume valuation of digital content distributed uniformly over interval [0 : 1]

v(1 - d) - p when s/he purchases an originalU = v(1 - q) - z when s/he pirates/copies content

0 when s/he does not consumes digital content at all (none).

• Consumer‘s utility function is given as:

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Impact of DRM on Consumer Behavior

• Demand without DRM

• Demand with DRM

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Conclusion• Two implications of DRM

• DRM increases copying costs (probability caught m) • Consumer Y stop copying• Consumer X begin purchasing

• DRM reduced value of original (d)• Consumer Y no effect• Consumer X starts copying

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Thank you...

Questions?

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The Author – mini CVProf. Dr. Marc Fetscherin

Department of International BusinessRollins College, USAmfetscherin@rollins.edu

Studied finance and marketing at the University of Lausanne (HEC) and holds a Masters degree in IT and Strategy from the London School of Economics (LSE). He worked as a consultant at McKinsey & Company where he got specialized in telecommunication and e-commerce. He was a PhD student at the University of Bern and was a visiting researcher at the University of California at Berkeley. He was a Fellow at Harvard University (Post-Doc) and is currently an Assistant Professor at Rollins College in the International Business Department and the Crummer Graduate School of Business, ranked 14th best MBA in the USA according to Forbes Magazine. He his authors of multiples articles, book chapters, conference proceedings and presentations as well as is member of various expert groups in the field of digital content, piracy and Digital Rights Management.