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Settling Lawsuits with Pirates

Author

Listed:
  • Xinyu Hua

    (Department of Economics, The Hong Kong University of Science and Technology)

  • Kathryn E. Spier

    (Harvard Law School and NBER)

Abstract

A firm licenses a product to overlapping generations of heterogeneous consumers. Consumers may purchase the product, pirate/steal it, or forego it. Higher consumer types enjoy higher gross benefits and are caught stealing at a higher rate. In this framework, the firm may commit to an out-of-court settlement policy that is "soft" on pirates, so high-types purchase the product and low-types steal the product until caught and subsequently settle. Settlement contracts, which include both cash payments and licenses for future product use, facilitate price discrimination. License duration is (weakly) longer when property rights are stronger, network externalities are significant, and entry threats exist. Settlement may either create social value by expanding the market or destroy social value by limiting market access and possibly deterring more efficient entrants.

Suggested Citation

  • Xinyu Hua & Kathryn E. Spier, 2021. "Settling Lawsuits with Pirates," HKUST CEP Working Papers Series 202104, HKUST Center for Economic Policy.
    • Handle: RePEc:hke:wpaper:wp2021-04
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    References listed on IDEAS

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