Quantifying the Impacts of Digital Rights Management and E-Book Pricing on the E-Book Reader Market

The demand for electronic books (e-books) and the e-book readers are complementary. On the one hand, the emergence of e-book readers such as Amazon’s Kindle has triggered the recent growth of the e-book market. On the other hand, several issues in the e-book market can affect the future of the e-book reader market. Considering this complementarity, this paper quantifies the impact of digital rights management (DRM) and discounted e-book pricing on the demand for e-book readers. The lack of rich market data leads us to collect conjoint survey data on e-book device consumption. We then estimate a random coefficient demand model using a hierarchical Bayesian method. Our counterfactual experiments suggest two things. First, if Kindle or Nook were to drop DRM unilaterally then their market share would increase by about four percent each while iPad’s market share is relatively unaffected; Consumer welfare would increase by four percent or more without DRM. Second, a 20 percent increase in e-book prices following the agency model would increase iPad’s market share by one to two percent at the expense of Kindle and Nook; Consumer welfare would decrease by three to five percent if Kindle’s and Nook’s e-book prices went up by 20 percent.