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Piracy, Awareness and Welfare in a Required Aftermarket

  • Ben O. Smith

Many industries have two sales stages: the primary market and the aftermarket. Existing research shows consumers are routinely unaware of aftermarkets (Cruickshank, 2000; Hall, 2003); and due to legal or structural restrictions, firms commonly have monopoly power (Borenstein et al., 2000; Adelmann, 2010). However, the primary market could be a great deal more competitive. Examples of this sales process include products with service agreements, software with in-app purchases, and durable goods with required replacement parts. But in many of these aftermarkets, the consumer has the option to obtain the aftermarket product through non-traditional means (e.g. “piracy”). We model such an environment by combining the two most common travel cost models: A Salop circle (Salop, 1979) for the primary market and a Hotelling linear city (Hotelling, 1929) for the aftermarket. We find that firms with more competition in the primary market will spend more on “enforcement” (disincentivising non-traditional acquisitions) and reduce prices in the primary market so they may exhibit more market power in the aftermarket. This is in direct contradiction with the common belief that anti-piracy efforts are the domain of “big business” (Tan, 2002; Kwong et al., 2003; Lysonski and Durvasula, 2008). Further, we find that it is social welfare enhancing for “enforcement” spending to be as effective as possible.

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Paper provided by Job Market Papers in its series 2013 Papers with number psm164.

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Date of creation: 07 Oct 2013
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Handle: RePEc:jmp:jm2013:psm164
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  1. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  2. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  3. 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.
  4. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
  5. Severin Borenstein & Jeffrey K. Mackie-Mason & Janet S. Netz, 2000. "Exercising Market Power in Proprietary Aftermarkets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 157-188, 06.
  6. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
  7. Kinokuni, Hiroshi, 1999. "Repair Market Structure, Product Durability, and Monopoly," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 343-53, December.
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