sh ape. they will consider which online music shop to choose. we make a review of the literature on the durable goods and show that even though renting the durable good is often the winning strategy in the case of a monopoly. The dur able part of the good may even been sold below its marginal cost in order to increase future profits.com/abstract=1371097 Electronic copy available at: http://ssrn. we now need to critically assess the efficiency of the selling strategy.org/ Sponsored by the 6th Framework Programme of the European Union This working Louis Vuitton Outlet is submitted by: Thierry Rayna Department of Economics. 4. since for a firm with a lot of market power. are a better source for pirates.4. the time the consumers devote to old and newly acquired records and on the difference of quality (or utility) between the newly released record and the previous ones. they can prevent the existence of a secondary market. This type of strategy would be very close to the one adopted by Rockefeller when the Standard Oil was giving away free kerosene lamps (durable) in order to create a large consumer base for oil (non-durable) and a market lock-in. 25At least at first. since they also have monopoly power.ac. this firm could even be regarded as a monopoly. WAV. this type of actions is only authorised after the purchase of the music file. One of the other main determinants is actually the presence of pre-existing switching costs which are most of the time related to the existence of a non-durable complement. Thus. the consumers have to renew their purchase on a regular basis. it seems that only the iTMS meets all these requirements. Therefor e. the renting strategy can be superior to the selling strategy since it creates long run switching co sts. For example. The complementarity between the music player produced by Sony and LV Outlet Online online music service ?C Sony Connect ?C is certainly as tight as the complementarity betw een the iTMS and the iPod. http://www. Norms and Standards on Knowledge Exchange?? Further information on the DIME IPR research and activities: http://ipr. Neverthele ss. most of the firms decided to adopt a re nting strategy: for a monthly fee users can listen to as much of music as they want. we showed that selling is the strategy adopted by firms protected by switching costs. As none of the existing protection systems is really better than the others. United Kingdom bGREQAM. the consumer would be able to totally recover the money spent on the songs and the only switching cost would be to re-download the songs from a new provider. copyrights and Louis Vuitton Outlet Online rights. However. By analysing the online music market. the durability of music is only one of the determinants of the choice between renting and selling. a consumer subscrib ing to a rental service would face a seriously restricted choice in terms of which music player she can purchase in order to listen to the rented music.4. music recording have a very high satiation point and can be consumed over and over during years. Unless the music in only consumed Louis Vuitton Outlet a computer. they will face another type of competition: due to the durability of music. the inputs are controlled by another highly oligopolistic industry. which can be considered as non-durable since the recurrent updates of Windows tends to make the previous version obsolete26. th e music market is subject to an intense piracy phenomenon and t hus we need to assess the performance of these two strate gies with regard to piracy. 3. the music files can only be played by the iPod. to listen to music not purchased on the iTMS on an iPod. we now need to critically assess the efficiency of the selling strategy. Renting Music Online Thierry Rayna a . whereas the other firms tend to choose renting in order to create swit ching costs. However. By analysing the online music market. What is more. as long as firms release new versions of the software. The market share of the non- durable is significant. creating switching costs and barriers to entry ?C guaran tees of a long run advantage ?C rather than with the problem of durability of the good. only a few music players are compa tible at the moment with such DRM systems38. Indeed. consumers usually consume Netscape Navigator against Microsoft Internet Explorer was the bundling - or tying - of Internet Explorer with Windows. these technologica l limitations tend to decrease the interest of a subscription-based service since the management of the consumer??s music librar y subsequently becomes quite complicated. not being compatible with the iPod ?C which is the case of all the Louis Vuitton Outlet Louis Vuitton Outlet Store except the iTMS ?C restricts th e market share to at most 30 % since the market share of the iPod is 70 %. Thus. colour. at least at first.1. however. We can notice that this seems to be the case for the online music market. why would they continue paying the subscription once all the songs have been bought? The incompatibilities and the limitations of the DRM systems tend to seriously undermine the interest for the consumers of a subscription service. are a better source for pirates. they have no particular reason to rent. rather than to sell. louis vuitton outlet louis vuitton outlet 27Assuming that the prices of the rental services are the same. price. Thus. The market share of the non- durable is significant. 6% and 6%) is certainly higher than the market share of th e firms who do not benefit from high switch costs and decided to sell36.1. The mater is even worse for the CDs since the current CD-Audio system does not include any DRM system at all. at first. This may explain why Microsoft. and as there are no close substitutes.2. this firm could even be regarded as a monopoly. the time the consumers devote to old and newly acquired records and on the difference of quality (or utility) between the newly released record and the previous ones. Indeed. The first factor that tends to limit the market share of renting firms is due to technological difficulties: the implementation of the DRM system is much more complex for a renting firm than for a selling firm. Therefor e. since it would not be possible to play the songs pr otected by Microsoft??s DRM on another operating system. such significant result was not subsequently achieved when the DVD audio were released. only seven devices are fully compatible with Real Networks?? Rhapsody service and ei ght with Napster??s. in addition to proprietary format.b aDepartment of Economics. or as Microsoft thought they had). its quality - is reduced. The original providers of music. a selling strategy. a renting strategy is adva ntageous in the sense that it creates switching costs both for th e previously obtained musical files but also for the future ones. Renting Music Online Thierry Rayna a . in fact. New versions of software and operating systems are released on regular basis. and renting would. etc. The three firms that decided to sell music instead of renting are Apple. they will consider which online music shop to choose. the presence of a durable good leads to a loss of market power for the firms. Although this was the case with the Audio CD. we now need to critically assess the efficiency of the selling strategy. or a new subs titute good with better features is produced and this makes the previous durable good obsolete. since consumers were reluctant to buy players that did not allow to play MP3 files. http://www. 22 None of the online music stores allows the re-selling of purchased music recording. for the selling firms. the recording companies. This may explain why Microsoft. as they already benefit from switching costs. rather stagnant.4 that it is this very same complementary non-durable good that create switching costs for the durable good. the iTunes Music Store has more than 70 % of the online music market. selling. the endogenous switching costs allow the firm to lock the consumers in and to price discriminate between old consumers and newcomers. This gives another reason to 24 Thus.2. and ultimately Sony had to drop this strategy in order to get a chance to increase its market share. working on the economic and social consequences of increasing globalization and the rise of the knowledge economy. In this situation. as discussed in section 2. However. As the intrinsic durability of music can not be reduced. this duality can give the consumer the impression that she is paying twice for the same thing: the monthly 37See section 1. buy a new player and subscribe to the new one. It is worth noticing that by choos ing a selling strategy the firms are subject to the Coase conjecture due to the durability of music. 1996). might explain the switch of Microsoft towards a renting strategy. an important part of 31 available on the internet allows to remove the protection of any protected music file without having to re-encode the file. Selling certainly allows Sony to lock-in some consumers. Microsoft supplies a complementary soft ware. all the subscription-based services also o ffer the possibility to buy music. In a first part.org/ DIME Working Papers on INTELLECTUAL PROPERTY RIGHTS http://ipr. despite this relative success.