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Piracy, Awareness and Welfare in a Required Aftermarket

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  • Ben O. Smith

Abstract

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. âpiracyâ). 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 âenforcementâ (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 âbig businessâ (Tan, 2002; Kwong et al., 2003; Lysonski and Durvasula, 2008). Further, we find that it is social welfare enhancing for âenforcementâ spending to be as effective as possible.

Suggested Citation

  • Ben O. Smith, 2013. "Piracy, Awareness and Welfare in a Required Aftermarket," 2013 Papers psm164, Job Market Papers.
  • Handle: RePEc:jmp:jm2013:psm164
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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