Imagine buying George Orwell’s 1984 and Animal Farm on your Kindle, only for Amazon to reach into your device and remove the two classic novels. It sounds unsettling, but it happened in 2009 when a third-party seller lost the rights to distribute the books. Customers got their money back, and Amazon acknowledged that it had handled the situation poorly. But the incident raised a troubling question: what does it actually mean to own something in the digital marketplace?
Had you bought those two books in hardcover, the retailer could not remotely remove them from bookshelf. But digital purchases can work differently. Consumers aren’t always buying a copy they can keep and control. Sometimes, they’re simply buying a license to access them for a certain amount of time and under certain conditions.
At first glance, this may not seem like a major economic issue. Both sides of a voluntary exchange expect to benefit from it. But digital rights create new information asymmetries that impede competition. Economists describe information asymmetry as a situation in which one party possesses relevant information that another lacks.
Say a consumer has two options for purchasing the same song or book for $15. Retailer A offers an independent downloadable file, while retailer B offers access through its digital platform, subject to certain licensing restrictions. Some consumers may prefer the convenience of retailer B, while others may value the greater control offered by retailer A. With clear information, consumer preferences would help determine which product succeeds. But when retailer B fails to adequately explain the limits of its license, consumers may not understand or may undervalue the additional rights retailer A offers, weakening competition on those terms.
Are consumers, then, well aware of the limits of their licenses when they make digital purchases? Research by Aaron Perzanowski and Chris Jay Hoofnagle suggests otherwise. In a 2017 article, the two researchers describe a survey of nearly 1,300 consumers involving a simulated digital marketplace. Among respondents presented with a “Buy Now” button, more than 83 percent believed they were purchasing ownership rights, while more than 86 percent believed they could keep the digital product indefinitely.
Perzanowski and Hoofnagle also tested a potential solution: giving shoppers a short explanation of their rights. In their study, 86 percent of respondents who saw the standard purchasing language believed they were buying ownership rights to an e-book, compared with 63 percent of those who received a clearer explanation.
Even among shoppers who received additional information, nearly two-thirds still believed they were buying ownership rights. Now, someone buying a movie to watch once may prefer a cheaper, temporary license (like renting from Amazon), while someone else would happily pay more for durable access. Both approaches are valid, as long as buyers can accurately distinguish between the two.
These ownership rights can matter greatly. With a physical good, a consumer might recover some of what she originally paid by selling a used copy to someone else. She could also lend it to a friend or donate it to charity. These options have value, and she might be willing to pay more upfront for a product that includes those rights than one that doesn’t.
Amazon’s Kindle controversy involved the removal of purchased files. A different vulnerability emerged when streaming service Funimation shut down in April 2024 and its operations were folded into Crunchyroll. Some consumers had purchased Funimation DVDs and Blu-rays that came with digital copies of the same shows. But Crunchyroll did not support those digital copies, so while customers could still enjoy their physical discs, they lost access to the digital component of their purchases.
The economics of intellectual property can cut either way. Licensing can expand access to creative works by allowing sellers to offer different prices, subscription models, and usage rights to consumers with different preferences. But goods can also be purchased, say, as independent, downloadable digital files rather than merely through access to some platform. Still, consumers may not always be aware of that option or understand how it differs from purchasing a license. With those differences made clear, we might reasonably expect competition to lead firms to differentiate their products on those terms.
Existing consumer protection laws already prohibit deceptive business practices, including misleading representations about what consumers are purchasing. But those laws don’t necessarily require digital retailers to clearly explain when a purchase provides only a license. Perzanowski and Hoofnagle’s proposal goes a step further by calling for clearer disclosures of consumers’ rights. In other words, companies should say “License” when they mean it, rather than leaving customers to assume they’re buying full ownership.
One version of this proposal has already become law. California’s Assembly Bill 2426 took effect on January 1, 2025, and, subject to certain exceptions, requires disclosures (or a consumer acknowledgment of those terms) when certain digital goods are licensed but advertised as purchases. Rather than prescribing ownership rights for digital goods, AB 2426 focuses on disclosure, leaving sellers free to compete over the rights they offer. That distinction matters when businesses are competing to offer consumers different ownership rights.
Rather than legislating ownership rights for all digital goods, AB 2426 focuses on disclosure, allowing digital sellers to compete over which sort of rights to offer. But disclosure could go further by addressing an important feature of a digital purchase: is it a standalone digital good that can be stored independently on my device, or is it only accessible as long as I have access to the retailer’s platform?
Including this distinction in existing deceptive trade practices laws, or laws like AB 2426, could better equip consumers to choose the digital goods they prefer. After all, how can consumers reward businesses for offering better ownership rights if they don’t know what they’re buying?