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Competition against peer-to-peer networks

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

In this paper, we consider the competition of a monopolistic provider of information products against a peer-to-peer file-sharing network that offers illegal versions of the products. We focus on the role of direct externalities caused by the P2P file-sharing technology rather than the indirect consumption externalities studied previously in the literature. In our model the market structure is endogenous and we characterize three possible scenarios where the firm uses monopoly pricing, network-deterring pricing, and network-accommodating pricing, respectively. We make a full comparative-static analysis of prices, quantities, profits, consumer surplus and total surplus for each of the scenarios as well as a comparison across scenarios. We show that in the case of network-accommodating pricing, the firm sets a higher price when facing a lower generic cost factor of downloading. Furthermore, in all scenarios, profits for the firm unambiguously decrease when the generic cost factor of downloading declines; total welfare unambiguously increases, however, a result that has implications for intellectual property rights enforcement policy.

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File URL: http://www.sciencedirect.com/science/article/B6V8J-5120JYH-2/2/af1393225a58342c26440a9a07c84a7c
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Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 22 (2010)
Issue (Month): 4 (December)
Pages: 315-331

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Handle: RePEc:eee:iepoli:v:22:y:2010:i:4:p:315-331
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505549

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  1. Gayer, Amit & Shy, Oz, 2003. "Internet and peer-to-peer distributions in markets for digital products," Economics Letters, Elsevier, vol. 81(2), pages 197-203, November.
  2. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
  3. Volker Nocke & Martin Peitz & Konrad Stahl, 2007. "Platform Ownership," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1130-1160, December.
  4. Liebowitz, S J, 1985. "Copying and Indirect Appropriability: Photocopying of Journals," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 945-57, October.
  5. repec:cup:cbooks:9780521800952 is not listed on IDEAS
  6. Nicholas Economides & Charles Himmelberg, 1995. "Critical Mass and Network Size with Application to the US Fax Market," Working Papers 95-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Oz Shy & Jacques-Françlois Thisse, 1999. "A Strategic Approach to Software Protection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(2), pages 163-190, 06.
  8. 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, vol. 42(2), pages 155-66, June.
  9. Peitz, Martin & Waelbroeck, Patrick, 2006. "Piracy of digital products: A critical review of the theoretical literature," Information Economics and Policy, Elsevier, vol. 18(4), pages 449-476, November.
  10. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  11. Fudenberg, Drew & Tirole, Jean, 2000. "Pricing a Network Good to Deter Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 373-90, December.
  12. Bae, Sang Hoo & Choi, Jay Pil, 2006. "A model of piracy," Information Economics and Policy, Elsevier, vol. 18(3), pages 303-320, September.
  13. Paul Belleflamme, 2002. "Pricing Information Goods in the Presence of Copying," Working Papers 463, Queen Mary University of London, School of Economics and Finance.
  14. Kathleen Reavis Conner & Richard P. Rumelt, 1991. "Software Piracy: An Analysis of Protection Strategies," Management Science, INFORMS, vol. 37(2), pages 125-139, February.
  15. repec:cup:cbooks:9780521805001 is not listed on IDEAS
  16. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  17. Johnson, William R, 1985. "The Economics of Copying," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 158-74, February.
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