IDEAS home Printed from
   My bibliography  Save this article

Piracy and Product Differentiation in the Market of Digital Goods


  • Matteo Alvisi
  • Elena Argentesi
  • Emanuela Carbonara


We analyse how piracy affects the choice of quality of a monopolist producing a digital good. A digital good is a special kind of information good, for example a music CD, a DVD or an electronic magazine available online. An important feature of digital goods is that they can be copied without a decline in the copy's quality. We define piracy as both the production and the sale of illegal copies and the practice of file sharing through the Internet. Recently, the introduction of fast Internet connections and peer-to-peer technologies (like Napster and Gnutella) has caused a huge increase in the copies and firms are adopting various measures to counteract this phenomenon. In this paper we focus on a firm's incentive to vertically differentiate the quality of its products in the presence of piracy. We show that without piracy and in the absence of production costs the monopolist never differentiates its product. With piracy, the monopolist might introduce a second, lower-quality good in order to induce consumers who acquire a pirated copy to buy the original. Hence differentiation may arise in equilibrium. This type of vertical differentiation is relatively widespread in the software market (consider the practice of distributing versions of a software with less features) and also in the music market (for example, selling music online). We consider a model of vertical differentiation where consumers differ in two aspects. They have both different will-ingness to pay for quality and different costs of accessing a pirated copy. Moreover, those with a greater cost of pirating also have a higher willingness to pay for quality. In this framework we show that the monopolist has two different strategies. On the one hand it can produce just one quality and sell it only to consumers with a high willingness to pay whereas those with low willingness to pay for quality obtain a pirated copy. On the other hand, the monopolist can produce two different qualities, pricing them so that consumers with high willingness to pay buy both whereas those with low willingness to pay either buy the low quality or acquire a pirated copy. The introduction of protection devices that prevent copying or the enforcement of copyright laws increases quality levels, prices and therefore profits. Given that the monopolist sets a higher price for the low quality, the most interesting aspect of protection is to render differentiation more attractive, so that the main impact of protection is on product differentiation rather than on the extent of illegal demand.

Suggested Citation

  • Matteo Alvisi & Elena Argentesi & Emanuela Carbonara, 2003. "Piracy and Product Differentiation in the Market of Digital Goods," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 219-244.
  • Handle: RePEc:mul:jqat1f:doi:10.1427/11470:y:2003:i:2:p:219-244

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers

    File URL:
    Download Restriction: no

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Tunay I. Tunca & Qiong Wu, 2013. "Fighting Fire with Fire: Commercial Piracy and the Role of File Sharing on Copyright Protection Policy for Digital Goods," Information Systems Research, INFORMS, vol. 24(2), pages 436-453, June.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mul:jqat1f:doi:10.1427/11470:y:2003:i:2:p:219-244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.