Jeevan Jaisingh is an assistant professors in the Dept. of Information and Systems Management at HKUST Business School in Hong Kong. He has recently published a very interesting paper on SSRN. Link to the 24-page paper here: Piracy on File Sharing Networks: Strategies for Recording Companies.

Here's the abstract:

In this paper we study the impact of selling music as downloads, on piracy, and the strategies recording companies should adopt to increase profits. We find that total music sales and profit of firm is higher, and total piracy (demand on file sharing network) is lower, when the firm sells a downloadable version. We look at the firm's optimal choice of Digital Rights Management (DRM) protection, and find that revenue decreases with increased protection, and so it is optimal for the firm not to employ any DRM, in the absence of network effects. Listening to music or watching video protected by DRM is cumbersome to users. They have to download license files, there are restrictions on the number of times the file can be copied, and restrictions on the type of devices that can play the file. As a result there is a disutility to the legal consumer, because of which the firm charges lower prices. Loss in revenue due to decreased prices cannot be compensated by the increase in demand, and hence revenue decreases with higher protection. When network effects (NE) is high, and a nominal search cost is above a certain threshold, then non-zero protection becomes optimal. This result is exactly the opposite of what was found in previous research (Conner and Rumelt 1991), where protection was found to be optimal in the absence of NE, and zero protection was optimal if NE is high enough.

There are also some interesting asides as well. For example,

The German media conglomerate Bertelsmann has announced recently that it is to begin offering “nofrills” and luxury versions of CDs in a bid to combat piracy. Bertelsmann will offer three versions of its CDs, a €=9.99 version, with only the title printed on the disc and nothing else; a €=12.99 version, which will look like a regular CD, with a cover and liner notes; and a deluxe version costing €=17.99, which will include video clips and other additional material (Philips 2004). This provides anecdotal evidence which supports our result that versioning is an appropriate strategy to fight piracy. The versioning we considered was providing a no-frills version through downloads, while the strategy Bertelsmann is adopting is providing a "no-frills" version of the CD, however the intuition for both is the same. Bertelsmann’s record label, BMG, hopes that the move will boost sales by up to 25 per cent (Philips 2004).

via Legal Theory Blog