COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1505

Flexibility as an Instrument in Digital Rights Management

Dirk Bergemann, Thomas Eisenbach, Joan Feigenbaum and Scott Shenker

April 2005

We consider the optimal design of flexible use in a digital-rights-management policy. The basic model considers a single distributor of digital goods and a continuum of consumers. Each consumer can acquire the digital good either as a licensed product or an unlicensed copy. The availability of (or access to) unlicensed copies is increasing both in the number of licensed copies and in the flexibility accorded to licensed copies. We thus analyze the optimal design of flexibility in the presence of unlicensed distribution channels (the "greynet").

We augment the basic model by introducing a "secure platform" that is required to use the digital good. We compare the optimal design of flexibility in the presence of a platform to the one without a platform. Finally, we analyze the equilibrium provision when platform and content are complimentary goods but are distributed and priced by different sellers.

Keywords: Digital Rights Management, Platform, Flexibility, Piracy

JEL Classification: C79, D42, L15