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Pricing information goods with piracy and heterogeneous consumers

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  • Waters, James
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    Abstract

    We present an information good pricing model with persistently heterogeneous consumers and a rising marginal propensity for them to pirate. Three offsetting pricing mechanisms occur: skimming, compressing price changes, and delaying product launch. We identify a novel trade off in piracy's effect on welfare. We find that piracy quickens sales times and raises welfare in fixed capacity markets, and does the opposite in growing markets. In our model, consumers benefit from piracy except at very high rates in rapidly expanding markets, legal sellers always dislike it, and pirate providers like high but not very high rates. Purchase delay, transient heterogeneity, inelastic demand, and network externalities reduce piracy's effect, but demand uncertainty doesn't.

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    File URL: http://mpra.ub.uni-muenchen.de/46918/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46918.

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    Date of creation: 12 May 2013
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    Handle: RePEc:pra:mprapa:46918

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    Keywords: Information goods; software; piracy; skimming; intertemporal price discrimination; prices; pricing; welfare;

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    1. 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.
    2. Yoon, Kiho, 2002. "The optimal level of copyright protection," Information Economics and Policy, Elsevier, Elsevier, vol. 14(3), pages 327-348, September.
    3. Cremer, Helmuth & Pestieau, Pierre, 2009. "Piracy prevention and the pricing of information goods," Information Economics and Policy, Elsevier, Elsevier, vol. 21(1), pages 34-42, February.
    4. Novos, Ian E & Waldman, Michael, 1984. "The Effects of Increased Copyright Protection: An Analytic Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(2), pages 236-46, April.
    5. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics, Springer, Springer, vol. 5(3), pages 239-292, September.
    6. Geroski, Paul A, 1999. "Models of Technology Diffusion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2146, C.E.P.R. Discussion Papers.
    7. Besen, Stanley M & Kirby, Sheila Nataraj, 1989. "Private Copying, Appropriability, and Optimal Copying Royalties," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages 255-80, October.
    8. Besen, Stanley M., 1986. "Private copying, reproduction costs, and the supply of intellectual property," Information Economics and Policy, Elsevier, Elsevier, vol. 2(1), pages 5-22.
    9. Herings P. Jean-Jacques & Peeters Ronald & Yang Michael S., 2009. "Piracy on the internet: Accommodate it or fight it? A dynamic approach," Research Memorandum 034, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    10. Bae, Sang Hoo & Choi, Jay Pil, 2006. "A model of piracy," Information Economics and Policy, Elsevier, Elsevier, vol. 18(3), pages 303-320, September.
    11. Khouja, Moutaz & Smith, Michael Alan, 2007. "Optimal pricing for information goods with piracy and saturation effect," European Journal of Operational Research, Elsevier, Elsevier, vol. 176(1), pages 482-497, January.
    12. Takeyama, Lisa N, 1994. "The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 155-66, June.
    13. Johnson, William R, 1985. "The Economics of Copying," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(1), pages 158-74, February.
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