Welfare analysis on the effect of compatible DRM adoption in the Korean online music market

Abstract

The paid online music market has been initiated and activated with the adoption of Digital Right Management (DRM) technologies. However, strong implementation of DRM violates user rights on legal contents and can reduce the incentive of potential users to purchase contents in competition against the P2P black market. The incompatibility of different DRMs leads to the separation of the contents market according to which DRM is being used, and this has an anticompetitive effect among service providers. In the Korean market, incompatibility problems are closely linked to such issues as competition between mobile firms and non-mobile firms, profit distribution conflicts between mobile firms and contents right holders, and market expansion. In this paper, we analyze the results of the compatibility decision in the Korean online music market. A simple model is derived from the current Korean market condition, and changes in social welfare are measured through a comparison between an incompatible monopoly market and a compatible competition market. The model shows that the compatibility decision increases consumer utility and decreases producer profit considerably. The adoption of compatible DRM is, therefore, assumed to increase social welfare.