Abstract
Rather than tolerating piracy or increasing sanctions, an artist can release his product directly to consumers by allowing them to download it under a ‘pay-what-you-want’ online strategy. We show analytically that this strategy can (1) be more profitable than a strategy with perfect or imperfect intellectual property rights enforcement for the artist and (2) change the organization and allocation of added value between artists and publishers along the supply chain. This higher profit result is achieved through an increased demand for live performance and positive voluntary contributions of downloaders directly pocketed by the artist. Indeed, a ‘pay-what-you-want’ strategy allows artists to reduce piracy without using sanctions while benefiting from a strategic negotiation ‘weapon’ in the relationship with record labels. Moreover, consumers draw procedural utility from the way the product is delivered. Counter-intuitively, rather than advocating for elimination of conventional releases at posted prices, pay-what-you-want strategies may need them to remain successful. A brief case study of Radiohead’s experiment and anecdotal evidence are developed to support these theoretical insights. Some implications regarding the re-organization of the supply chain and property rights regime are drawn.
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Notes
Interestingly, the pay-what-you-want procedure has recently been applied to other non-digital products such as the Singapore Ibis hotel (http://paywhatyouwant.com.sg/), the Little Bay restaurant, in Farringdon, London (http://www.timesonline.co.uk/tol/life_and_style/food_and_drink/eating_out/article5767771.ece), the advertising agency Nil (http://www.agencynil.com/) or a tourist destination in Tyrol’s valley (http://www.live-qualitycheck.com/).
At this stage, let us indicate how the pay-what-you-want strategy differs from free pricing strategies. Indeed, free pricing strategies are generally related to two sided market pricing strategies where the platform attracts one side by offering services below costs (ultimately for free) to attract the less price sensitive users on the other side of the market. However, the pay-what-you-want approach is different from the two sided market strategy in several aspects: An important feature of two sided market is the interaction between the two sides via the platform. We do not allow for this kind of interaction in our model. Moreover, in a two sided network, members of each group have preferences regarding the number of users in the other group, i.e., the cross-side network effect. In our model, we assume that these effects do not exist. The network effect we consider in the following is a global one and occurs regardless of the consumers’ type. In addition, unlike a two-sided market context where the platform manager has to fix prices, in a pay-what-you-want strategy the artist does not fix any price. The contributions of downloaders are freely chosen.
The economic literature develops several rationales where piracy might be beneficial for the pirated firm. A recent review of mechanisms that ameliorate negative impacts of copying with a particular emphasis on the sound recording market can be found in Liebowitz and Watt (2006). These arguments are mainly related to network effects as in Conner and Rumelt (1991), Slive and Bernhardt (1998), Gayer and Shy (2003), sampling and exposure effects as in Liebowitz (2004) or Peitz and Waelbroeck (2004), and Coase’s time inconsistency effects as in Takeyama (1997).
This scheme applies mainly in developed countries (Europe, Australia and North America) while in developing countries, many people either purchase a pirated product at a small price or pirate themselves the product.
We do not consider the possible utility that results from ‘distinction’ effects where there is a utility increase because of the small number of users.
These experiments frequently involve small amounts and show decreasing cooperation as the game proceeds. Players seem to gamble initially on cooperation and then are disappointed and contribution rates fall, although they do not reach zero as would be anticipated by theory. Accordingly, it is plausible to believe that fans are ‘weakly’ generous. Interestingly, this argument can be related to the relative failure of the Stephen King’s experiment of releasing gradually a novel on line, The Plant. The main idea was the release of each chapter before being paid for it. Nevertheless, the next chapter would not be released until a sufficient portion of downloaders had paid for the prior release. According to the author's assistant Marsha DeFillipo, ‘only 46 percent of the people who downloaded the book paid for it’ and King did not complete the book (Rose, 2000), even if it has generated ‘$700,000 for the sections King did provide, almost half a million of it pure profit’ (Zimmerman, 2003).
In addition to the sources quoted in this section, the authors have gathered and structured information from several websites, notably, the sites of comScore (http://www.comscore.com) and Rolling Stone (http://www.rollingstone.com).
It could be easily objected that Radiohead experiment worked because they had already established a brand name through the traditional ‘property rights’ channel. Without excluding this possibility, let us report the experiment of a less famous band in their own terms ‘We tried this experiment with Ben Taylor at his show Friday night at the bluebird Theater in Denver. Ben made a very articulate announcement from stage stating that due to the economy etc., we’ve decided to let people take his music home at a price of their choice. Also mentioning that the suggested retail price was $15. We took in well over $1 k in CD sales, double what we would on an average night. We normally sell 3 Full Lengths at $15 each and an EP at $5. We sold a total of 84 CD's averaging almost $12 per CD! Last night we were in Jackson Hole, the trend continued, proving another good night. Where we sold 48 CD's and averaged almost $11 a CD. We are moving more product than we normally would and in average making more than what our CD were to sell on iTunes or a record store (…).’ (http://www.musicthinktank.com/blog/sell-more-cds-at-shows-by-not-naming-the-price.html, visited on February, 15, 2010).
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Acknowledgments
We are grateful for comments from Jonathan Barnett, Naoufel Mzoughi, Raphaele Préget, Tina Rambonilaza and Bénédicte Rulleau.
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The usual disclaimer applies. Comments are welcome at grolleau@supagro.inra.fr.
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El Harbi, S., Grolleau, G. & Bekir, I. Substituting piracy with a pay-what-you-want option: does it make sense?. Eur J Law Econ 37, 277–297 (2014). https://doi.org/10.1007/s10657-011-9287-y
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DOI: https://doi.org/10.1007/s10657-011-9287-y