Retail Strategies in the Presence of Online Music Sharing

Advances in online technologies and bandwidth availability have opened new vistas for online distribution of digital goods. But potential benefits for consumers are juxtaposed against challenges for retailers of such goods. Here we investigate one type of digital good music whose market faces the very real presence of online piracy options. While arguments abound for and against online distribution of such digital goods, little research exists in this area. We model five different market environments for retailers, from a traditional brick and mortar retailer not facing a piracy option to an online retailer offering multiple pricing options to consumers who have opportunities for unauthorized sharing. Retailer cost to music publishers is modeled using a variety of licensing schema. Results from survey together with data from music sharing sites are utilized to investigate the validity of a key assumption. Finally, extensive simulation analysis is used to develop insights related to conditions that cannot be solved for analytically. We find that online selling strategies for a traditional retailer can provide additional profits even in the face of existing piracy options. Our results clearly indicate that decreasing piracy is not necessarily equivalent to increasing profit. In addition, leading strategies for such business should include the use of pricing options, provision of efficient search tools to consumers and new approaches to licensing structures with music publishers.