A Pricing Equilibrium Model for Digital Music Market

Given the degrees of freedom on the internet and the ease of obtaining perfect replicates of digital music files, internet piracy of digital music is a serious free-riding problem that has become a social phenomenon. We argue that using the pirated digital music as a promotional tool could be beneficial to the record labels by increasing consumers' brand premium value. In this paper, we present the preliminary design of a self-selection model on optimal pricing of digital music. The model provides strategies to the recording industry to effectively price its products with the co-existence of piracy.