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Digital Piracy: A Competitive Analysis

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  • Sanjay Jain

    ()
    (Mays Business School, Texas A&M University, College Station, Texas 77843)

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    Abstract

    In recent years, the issue of copyright protection for intellectual properties such as computer software, music CDs, and videos has become increasingly important. It is often claimed that illegal copying of intellectual property costs companies billions of dollars in lost revenues and reduces firms' incentives to innovate. Some researchers have shown that copying can be beneficial to firms when there are strong network effects and copying expands the market. In this paper, we first examine the impact of illegal copying of software and other similar intellectual properties on firms' prices, profits, and quality choices, even when there are no network effects and the market is saturated. We show that contrary to the claims of manufacturers, there are conditions under which copying can increase firms' profits, lead to better quality products, and increase social welfare. This is because weaker copyright protection enables firms to reduce price competition by allowing price-sensitive consumers to copy. Thus, copyright protection can serve as a coordination device to reduce price competition. We also examine how equilibrium copyright enforcement is affected by network externalities. In contrast to previous research, we show that strong network effects can sometimes lead to a firm choosing higher levels of copyright protection. Our results show that in the presence of strong network effects, copyright enforcement by one firm can serve as a coordinating device to reduce price competition.

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    File URL: http://dx.doi.org/10.1287/mksc.1070.0313
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 27 (2008)
    Issue (Month): 4 (07-08)
    Pages: 610-626

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    Handle: RePEc:inm:ormksc:v:27:y:2008:i:4:p:610-626

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    Related research

    Keywords: piracy; pricing; innovation; network effects; game theory;

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    Cited by:
    1. Jiri Strelicky & Kresimir Zigic, 2011. "Intellectual Property Rights Protection and Enforcement in a Software Duopoly," CERGE-EI Working Papers wp435, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    2. Nico van EIJK & Joost POORT & Paul RUTTEN, 2010. "Legal, Economic, and Cultural Aspects of file sharing," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(77), pages 35-54, 1st quart.
    3. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2013. "The Interaction between Private and Public IPR Protection in a Software Market: A Positive and Normative Analysis," CERGE-EI Working Papers wp490, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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