Why DRM Should Be Cause for Concern: An Economic and Legal Analysis of the Effect of Digital Technology on the Music Industry

In response to piracy and online file trading, the music industry has begun to adopt technological measures, often referred to as digital rights management (DRM), to control the sale and distribution of music over the Internet. Previous economic analysis on the impact of DRM implementation has been overly simplistic. A careful analysis of copyright law and the microeconomic principles governing the music industry demonstrates that commentators have failed to account for factors relevant to the measure of social welfare within the music industry. This paper develops a more refined economic model that is better suited to accurately assessing how legal or technological changes like DRM will affect the music industry. Utilizing a refined economic model, the analysis suggests that the economic effects of implementing DRM technology are generally negative, albeit uncertain. While DRM implementation may inhibit piracy, facilitate price discrimination, and lower transactional costs, it will likely decrease social welfare by raising barriers to entry and exacerbating a number of existing market failures. Specifically, DRM implementation may facilitate the extension of monopoly pricing, decrease the amount of information available to potential music consumers, diminish the number of positive externalities, and raise artistic and informational barriers to entry into certain genres of music.