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Piracy on the Internet: Accommodate it or fight it? A dynamic approach

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  • Herings, P. Jean-Jacques
  • Peeters, Ronald
  • Yang, Michael S.

Abstract

This paper uses a dynamic stochastic model to solve for the optimal pricing policy of music recordings in the presence of P2P file-sharing networks eroding their sales. We employ a policy iteration algorithm on a discretized state space to numerically compute the optimal pricing policy. The realistically calibrated model reflects the real-world figures we observe and provides estimates of the optimal pricing policy as well as comparative statics figures. The pricing policy is such that, for a given P2P network size, prices are increasing in the number of buyers of the product and, for a given number of buyers of the product, prices are non-monotonic in the P2P network size. Surprisingly, in the presence of P2P networks, increases in production costs and decreases in the valuation of the product increase the consumer and total surplus. A higher valuation of the product leads to a lower steady state price. Increased switching costs have a negative effect on prices and profits, so the long term incentive to attract new consumers dominates the short term incentive to harvest loyal consumers. The full enforcement of intellectual property rights has adverse effect on both consumer surplus and total welfare.

Suggested Citation

  • Herings, P. Jean-Jacques & Peeters, Ronald & Yang, Michael S., 2018. "Piracy on the Internet: Accommodate it or fight it? A dynamic approach," European Journal of Operational Research, Elsevier, vol. 266(1), pages 328-339.
  • Handle: RePEc:eee:ejores:v:266:y:2018:i:1:p:328-339
    DOI: 10.1016/j.ejor.2017.09.011
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. File sharing is welfare enhancing
      by Economic Logician in Economic Logic on 2009-12-10 06:07:00
    2. Was Napster Right?: Filesharing is good for social welfare
      by Christian Zimmermann in Against Monopoly on 2009-12-10 19:34:03

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    Cited by:

    1. Dan Wu & Guofang Nan & Minqiang Li, 2020. "Optimal Piracy Control: Should a Firm Implement Digital Rights Management?," Information Systems Frontiers, Springer, vol. 22(4), pages 947-960, August.
    2. Carlos M. Fernández‐Márquez & Francisco J. Vázquez & Richard Watt, 2020. "Social influence on software piracy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1211-1224, October.
    3. Ning, Yu & Xu, Su Xiu & Yan, Mian & Huang, George Q., 2018. "Digital pricing with piracy and variety seeking," International Journal of Production Economics, Elsevier, vol. 206(C), pages 184-195.
    4. Waters, James, 2013. "Pricing information goods with piracy and heterogeneous consumers," MPRA Paper 46918, University Library of Munich, Germany.
    5. Waters, James, 2015. "Welfare implications of piracy with dynamic pricing and heterogeneous consumers," European Journal of Operational Research, Elsevier, vol. 240(3), pages 904-911.

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