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Piracy of Digital Products: A Contest Theoretical Approach

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  • Hoffmann, Magnus
  • Schmidt, Frederik

Abstract

In the following, we examine a market of a digital consumption good with monopolistic supply. In this market, it is the ability of the consumer to bypass (”crack”) the copy-protection of the monopolist which induces a lower price of the digital good, compared to an uncontested monopoly (textbook case). We analyze the complex relationship between the cracking efforts of the consumer, the copy-protection efforts and the pricing decision of the monopolist, and the welfare of the economy. We find, for example, that the monopolist will deter piracy if the (exogenous) relative effectiveness of the consumer’s bypassing activity is low compared to the copy-protection technology. In this case welfare is lower than the welfare in the textbook case. On the contrary, welfare rises above the textbook case level if the relative effectiveness of cracking is sufficiently high.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3289.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:3289

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Keywords: Digital Products; Contests; Security of Property Rights; Endogenous Monopoly Price;

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  1. Gil S. Epstein & Shmuel Nitzan, 2002. "Political Culture and Monopoly Price Determination," CESifo Working Paper Series 646, CESifo Group Munich.
  2. Herschel I. Grossman, 2001. "The Creation of Effective Property Rights," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 347-352, May.
  3. Leidy, Michael P, 1994. " Rent Dissipation through Self-Regulation: The Social Cost of Monopoly under Threat of Reform," Public Choice, Springer, Springer, vol. 80(1-2), pages 105-28, July.
  4. Grossman, Herschel I & Kim, Minseong, 1995. "Swords or Plowshares? A Theory of the Security of Claims to Property," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(6), pages 1275-88, December.
  5. Paul Belleflamme, 2002. "Pricing Information Goods in the Presence of Copying," Working Papers, Queen Mary, University of London, School of Economics and Finance 463, Queen Mary, University of London, School of Economics and Finance.
  6. Martin Peitz & Patrick Waelbroeck, 2003. "Piracy of Digital Products: A Critical Review of the Economics Literature," CESifo Working Paper Series 1071, CESifo Group Munich.
  7. Epstein, Gil S. & Nitzan, Shmuel, 2004. "Strategic restraint in contests," European Economic Review, Elsevier, Elsevier, vol. 48(1), pages 201-210, February.
  8. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 215.
  9. Dixit, Avinash, 1982. "Recent Developments in Oligopoly Theory," American Economic Review, American Economic Association, American Economic Association, vol. 72(2), pages 12-17, May.
  10. Richard Allard, 1988. "Rent-seeking with non-identical players," Public Choice, Springer, Springer, vol. 57(1), pages 3-14, April.
  11. Epstein, Gil S. & Nitzan, Shmuel, 2003. "The social cost of rent seeking when consumer opposition influences monopoly behavior," European Journal of Political Economy, Elsevier, Elsevier, vol. 19(1), pages 61-69, March.
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