The impacts of piracy and supply chain contracts on digital music channel performance

We explore the impact of piracy on digital music supply chain profitability under different contract arrangements. Consumers' piracy risk cost is divided into two cases: 1) linear piracy cost and 2) fixed piracy cost. We also analyze two contract types: 1) fixed fee contract and 2) per song contract. Our findings indicate that the magnitude of profit loss depends on the type of consumers' piracy risk cost and the type of contract. In addition, changes in consumers' piracy risk cost change the distribution of the profit between the record label and the retailer. As the investment in piracy controls increases, the retailer keeps a larger share of the profit surplus leaving the record label with a smaller share. We demonstrate that a fixed fee full transfer contract will always coordinate the supply chain, and the profitability further increases as 1) market size increases, 2) piracy risk cost increases, and 3) marginal cost decreases.