How Much Do Consumers Value Interoperability? Evidence from the Price of DVD Players

Digital Rights Management (DRM) systems provide manufacturers the ability to control the use of their products after sale, imposing legal and technical restrictions on the functionality available to consumers. For example, the DRM system used in consumer DVD prevents players from being interoperable with unauthorised copies and well as authorized content (films) sold in different regions of the globe. Theory on interoperability and the ‘installed base’ identifies local benefits to consumers who either stay with an incompatible standard or adopt an interoperable system, with welfare effects from both cases. We explore the relationship between interoperability features and consumer willingness to pay, using an original dataset on consumer media players. We hypothesize that consumers derive specific benefit from backwards interoperability which enables playback of legacy disc formats the consumer may already own. We further hypothesize that consumers value forwards interoperability between their device and new and emerging technologies. Using a quasi-experimental setup, we use an Average Treatment Effect (ATE) estimator to evaluate the effect of interoperability features in new and used DVD players obtained from Amazon product listings. Nearest-neighbour matching is used to control for features such as manufacturer, technical specifications and condition of players. Based on analysis of the price and sales performance of 277 DVD players, we find that interoperability has a significant impact on price in the forwards direction. Players capable of playing new file formats such as Xvid command an average price which is $19.06 USD higher than the non-treated group. However, we find limited support for the impact of backwards compatibility on price, either for new or used players. The ability to play DVDs from multiple regions shows a moderately significant effect on price in our sample.