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Optimal Strategic Pricing of Reproducible Consumer Products

Author

Listed:
  • Fernando Nascimento

    (Catholic University of Portugal, Lisbon, Portugal)

  • Wilfried R. Vanhonacker

    (Graduate School of Business, Columbia University, New York, New York 10027)

Abstract

This paper investigates the strategic pricing of consumer durable products which can be acquired through either purchase or reproduction (e.g., computer software). As copy piracy results in an opportunity loss, its adverse effect on profits needs to be incorporated in strategic decisions such as pricing. Using a dual diffusion model which parsimoniously describes sales and copying, and employing control theory methodology, optimal price trajectories are derived for the period of monopoly. The results indicate that (a) in absence of any protection, skimming pricing strategies are generally optimal, and (b) copy protection is warranted only when sales diffuse much faster than copying and the protection technology does not significantly raise the marginal production cost.

Suggested Citation

  • Fernando Nascimento & Wilfried R. Vanhonacker, 1988. "Optimal Strategic Pricing of Reproducible Consumer Products," Management Science, INFORMS, vol. 34(8), pages 921-937, August.
    • Handle: RePEc:inm:ormnsc:v:34:y:1988:i:8:p:921-937
    DOI: 10.1287/mnsc.34.8.921
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    Cited by:

    1. Ahtiala, Pekka, 2006. "The optimal pricing of computer software and other products with high switching costs," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 202-211.
    2. Ming-Fang Tsai & Jiunn-Rong Chiou, 2012. "Counterfeiting, enforcement and social welfare," Journal of Economics, Springer, vol. 107(1), pages 1-21, September.
    3. Banerjee, Dyuti S., 2003. "Software piracy: a strategic analysis and policy instruments," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 97-127, January.
    4. Banerjee, Dyuti, 2013. "Effect of piracy on innovation in the presence of network externalities," Economic Modelling, Elsevier, vol. 33(C), pages 526-532.
    5. Dyuti S. Banerjee, 2014. "Effectiveness of government anti-piracy enforcement policy: commitment versus non-commitment," Chapters, in: Richard Watt (ed.), Handbook on the Economics of Copyright, chapter 15, pages 264-284, Edward Elgar Publishing.
    6. Dyuti S. Banerjee & Teyu Chou, 2007. "Copyright Protection And Innovation In The Presence Of Commercial Piracy," Monash Economics Working Papers 05-07, Monash University, Department of Economics.
    7. Rajat Acharyya & Dyuti S. Banerjee, 2017. "Does Tariff Induce Intellectual Property Right Protection and Reduce Incidence of Piracy?," Review of International Economics, Wiley Blackwell, vol. 25(2), pages 233-261, May.
    8. Khouja, Moutaz & Smith, Michael Alan, 2007. "Optimal pricing for information goods with piracy and saturation effect," European Journal of Operational Research, Elsevier, vol. 176(1), pages 482-497, January.
    9. E. J. Dockner & G. E. Fruchter, 2004. "Dynamic Strategic Pricing and Speed of Diffusion," Journal of Optimization Theory and Applications, Springer, vol. 123(2), pages 331-348, November.
    10. M Khouja & H K Rajagopalan, 2009. "Can piracy lead to higher prices in the music and motion picture industries?," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(3), pages 372-383, March.
    11. Bakos, Yannis & Brynjolfsson, Erik & Lichtman, Douglas, 1999. "Shared Information Goods," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 117-155, April.
    12. Arun Sundararajan, 2003. "Managing Digital Piracy: Pricing, Protection and Welfare," Law and Economics 0307001, University Library of Munich, Germany.
    13. Aaron Baird & Chadwick J. Miller & T. S. Raghu & Rajiv K. Sinha, 2016. "Product Line Extension in Consumer Software Markets in the Presence of Free Alternatives," Information Systems Research, INFORMS, vol. 27(2), pages 282-301, June.
    14. D Banerjee, 2004. "Sensitivity To Tax Revenues and Optimal Anti-piracy Policy Instruments," Econometric Society 2004 Australasian Meetings 330, Econometric Society.
    15. Dyuti Banerjee, 2011. "On the sufficiency of regulatory enforcement in combating piracy," Journal of Regulatory Economics, Springer, vol. 40(2), pages 160-176, October.
    16. Banerjee, Dyuti S., 2006. "Lobbying and commercial software piracy," European Journal of Political Economy, Elsevier, vol. 22(1), pages 139-155, March.
    17. Amit Mehra & Gireesh Shrimali, 2008. "Introduction of Software Products and Services Through "Public" Beta Launches," Working Papers 08-11, NET Institute.
    18. Dyuti S. Banerjee & Tanmoyee Banerjee (Chatterjee) & Ajitava Raychaudhuri, 2008. "Optimal Enforcement And Anti‐Copying Strategies To Counter Copyright Infringement," The Japanese Economic Review, Japanese Economic Association, vol. 59(4), pages 519-535, December.
    19. Lydia L. Gan & Hian Chye Koh, 2005. "The Profiles of Software Pirates among Tertiary Institutions in Singapore," Economic Growth Centre Working Paper Series 0508, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    20. Tsai, Ming-Fang & Chiou, Jiunn-Rong & Lin, Chun-Hung A., 2012. "A model of counterfeiting: A duopoly approach," Japan and the World Economy, Elsevier, vol. 24(4), pages 283-291.
    21. Dyuti Banerjee & Ahmed Khalid & Jan-Egbert Sturm, 2005. "Socio-economic development and software piracy. An empirical assessment," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2091-2097.
    22. T. S. Raghu & Rajiv Sinha & Ajay Vinze & Orneita Burton, 2009. "Willingness to Pay in an Open Source Software Environment," Information Systems Research, INFORMS, vol. 20(2), pages 218-236, June.
    23. Alan E. Woodfield, 2006. "Piracy Accommodation and the Optimal Timing of Royalty Payments," Working Papers in Economics 06/01, University of Canterbury, Department of Economics and Finance.

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    marketing; new products; pricing;
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