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Piracy Accommodation and the Optimal Timing of Royalty Payments

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Abstract

This paper generalizes the two-period model of Watt (2000) who demonstrates the possibility of optimal accommodation of a pirate when the royalty rate applying to a creation is uniform and second-period Cournot competition applies. Admitting nonlinear contracts with period-specific royalty rates that leave total payments unchanged, simulation analysis shows that a producer of originals does better to increase the royalty rate in period 1 and decrease the rate to a negative level in period 2, thereby more than offsetting the usual cost advantage available to a pirate. Watt's illustrative examples regarding piracy accommodation (but not piracy exclusion) are overturned when a nonlinear contract is chosen optimally, although accommodation remains optimal in some other cases. Further, where exclusion is impossible under uniform royalties, cases exist where exclusion is feasible under nonlinear royalties. Even so, accommodation may be a preferable strategy.

Suggested Citation

  • 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.
  • Handle: RePEc:cbt:econwp:06/01
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    File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/0601.pdf
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    References listed on IDEAS

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    1. 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.
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    3. Michele Boldrin & David Levine, 2002. "The Case Against Intellectual Property," American Economic Review, American Economic Association, vol. 92(2), pages 209-212, May.
    4. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    5. Liebowitz, S J, 1985. "Copying and Indirect Appropriability: Photocopying of Journals," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 945-957, October.
    6. Boldrin,Michele & Levine,David K., 2010. "Against Intellectual Monopoly," Cambridge Books, Cambridge University Press, number 9780521127264.
    7. Benjamin Klein & Andres V. Lerner & Kevin M. Murphy, 2002. "The Economics of Copyright "Fair Use" in a Networked World," American Economic Review, American Economic Association, vol. 92(2), pages 205-208, May.
    8. Johnson, William R, 1985. "The Economics of Copying," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 158-174, February.
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    10. Fernando Nascimento & Wilfried R. Vanhonacker, 1988. "Optimal Strategic Pricing of Reproducible Consumer Products," Management Science, INFORMS, vol. 34(8), pages 921-937, August.
    11. Novos, Ian E & Waldman, Michael, 1984. "The Effects of Increased Copyright Protection: An Analytic Approach," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 236-246, April.
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    Cited by:

    1. Richard Watt, 2014. "The basic economic theory of copyright," Chapters,in: Handbook on the Economics of Copyright, chapter 1, pages 9-25 Edward Elgar Publishing.
    2. Richard Watt, 2013. "Copyright law and royalty contracts," Chapters,in: Handbook on the Digital Creative Economy, chapter 18, pages 197-208 Edward Elgar Publishing.
    3. Richard Watt, 2014. "Copying and the pricing of information goods," Chapters,in: Handbook on the Economics of Copyright, chapter 12, pages 207-224 Edward Elgar Publishing.

    More about this item

    Keywords

    accommodating copyright piracy; nonlinear royalty contracts;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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