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Digital Piracy: A Competitive Analysis

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  • Sanjay Jain

    () (Mays Business School, Texas A&M University, College Station, Texas 77843)

Abstract

In recent years, the issue of copyright protection for intellectual properties such as computer software, music CDs, and videos has become increasingly important. It is often claimed that illegal copying of intellectual property costs companies billions of dollars in lost revenues and reduces firms' incentives to innovate. Some researchers have shown that copying can be beneficial to firms when there are strong network effects and copying expands the market. In this paper, we first examine the impact of illegal copying of software and other similar intellectual properties on firms' prices, profits, and quality choices, even when there are no network effects and the market is saturated. We show that contrary to the claims of manufacturers, there are conditions under which copying can increase firms' profits, lead to better quality products, and increase social welfare. This is because weaker copyright protection enables firms to reduce price competition by allowing price-sensitive consumers to copy. Thus, copyright protection can serve as a coordination device to reduce price competition. We also examine how equilibrium copyright enforcement is affected by network externalities. In contrast to previous research, we show that strong network effects can sometimes lead to a firm choosing higher levels of copyright protection. Our results show that in the presence of strong network effects, copyright enforcement by one firm can serve as a coordinating device to reduce price competition.

Suggested Citation

  • Sanjay Jain, 2008. "Digital Piracy: A Competitive Analysis," Marketing Science, INFORMS, vol. 27(4), pages 610-626, 07-08.
  • Handle: RePEc:inm:ormksc:v:27:y:2008:i:4:p:610-626
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    File URL: http://dx.doi.org/10.1287/mksc.1070.0313
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Jie & Zhang, Rachel Q., 2015. "Supply chain structure in a market with deceptive counterfeits," European Journal of Operational Research, Elsevier, vol. 240(1), pages 84-97.
    2. repec:eee:soceps:v:60:y:2017:i:c:p:49-61 is not listed on IDEAS
    3. Liang Guo & Xiangyi Meng, 2015. "Digital Content Provision and Optimal Copyright Protection," Management Science, INFORMS, vol. 61(5), pages 1183-1196, May.
    4. Michael R. Galbreth & Bikram Ghosh & Mikhael Shor, 2012. "Social Sharing of Information Goods: Implications for Pricing and Profits," Marketing Science, INFORMS, vol. 31(4), pages 603-620, July.
    5. repec:eee:ijrema:v:33:y:2016:i:2:p:343-356 is not listed on IDEAS
    6. Komarova, Anastasiya & Kurdin, Alexander, 2014. "The impact of digital piracy on market strategies in software," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 54-75, December.
    7. repec:eee:joinma:v:24:y:2010:i:2:p:138-154 is not listed on IDEAS
    8. Nikolay Zenkevich & Margarita Gladkova, 2016. "Price Competition on the Market of Counterfeiting Software," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-10, June.
    9. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2014. "How Does Public IPR Protection Affect its Private Counterpart? Copyright and the Firms' Own IPR Protection in a Software Duopoly," CERGE-EI Working Papers wp518, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    10. Khouja, Moutaz & Wang, Yulan, 2010. "The impact of digital channel distribution on the experience goods industry," European Journal of Operational Research, Elsevier, vol. 207(1), pages 481-491, November.
    11. repec:taf:intecj:v:31:y:2017:i:4:p:555-577 is not listed on IDEAS
    12. Nico van EIJK & Joost POORT & Paul RUTTEN, 2010. "Legal, Economic, and Cultural Aspects of file sharing," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(77), pages 35-54, 1st quart.
    13. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2013. "The Interaction between Private and Public IPR Protection in a Software Market: A Positive and Normative Analysis," CERGE-EI Working Papers wp490, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    14. Jiri Strelicky & Kresimir Zigic, 2011. "Intellectual Property Rights Protection and Enforcement in a Software Duopoly," CERGE-EI Working Papers wp435, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    15. P. K. Kannan & Barbara Kline Pope & Sanjay Jain, 2009. "—Pricing Digital Content Product Lines: A Model and Application for the National Academies Press," Marketing Science, INFORMS, vol. 28(4), pages 620-636, 07-08.
    16. repec:eee:ijrema:v:34:y:2017:i:1:p:22-45 is not listed on IDEAS
    17. Dinah A. Vernik & Devavrat Purohit & Preyas S. Desai, 2011. "Music Downloads and the Flip Side of Digital Rights Management," Marketing Science, INFORMS, vol. 30(6), pages 1011-1027, November.
    18. Atanu Lahiri & Debabrata Dey, 2013. "Effects of Piracy on Quality of Information Goods," Management Science, INFORMS, vol. 59(1), pages 245-264, June.
    19. Michel Clement & Arvind Rangaswamy & Srikant Vadali, 2012. "Consumer Responses to Legal Music Download Services that Compete with Illegal Alternatives," Service Science, INFORMS, vol. 4(1), pages 4-23, March.
    20. Godwin Udo & Kallol Bagchi & Moutusy Maity, 2016. "Exploring Factors Affecting Digital Piracy Using the Norm Activation and UTAUT Models: The Role of National Culture," Journal of Business Ethics, Springer, vol. 135(3), pages 517-541, May.
    21. repec:eee:jbrese:v:85:y:2018:i:c:p:209-225 is not listed on IDEAS
    22. Karthik Kannan & Mohammad S. Rahman & Mohit Tawarmalani, 2016. "Economic and Policy Implications of Restricted Patch Distribution," Management Science, INFORMS, vol. 62(11), pages 3161-3182, November.
    23. Brett Danaher & Samita Dhanasobhon & Michael D. Smith & Rahul Telang, 2010. "Converting Pirates Without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy," Marketing Science, INFORMS, vol. 29(6), pages 1138-1151, 11-12.
    24. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2014. "Analysis of protection and pricing strategies for digital products under uncertain demand," International Journal of Production Economics, Elsevier, vol. 158(C), pages 54-64.
    25. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2015. "Modeling Software Piracy Protection: Monopoly versus Duopoly," CERGE-EI Working Papers wp551, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    Keywords

    piracy; pricing; innovation; network effects; game theory;

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