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Managing Digital Piracy: Pricing, Protection and Welfare

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  • Arun Sundararajan

    (New York University)

Abstract

This paper analyzes the optimal choice of pricing schedules and technological deterrence levels in a market with digital piracy, when legal sellers can sometimes control the extent of piracy by implementing digital rights management (DRM) systems. It is shown that the seller's optimal pricing schedule can be characterized as a simple combination of the zero-piracy pricing schedule, and a piracy-indifferent pricing schedule which makes all customers indifferent between legal consumption and piracy. An increase in the level of piracy is shown to lower prices and profits, but may improve welfare by expanding the fraction of legal users and the volume of legal usage. In the absence of price- discrimination, the optimal level of technology-based protection against piracy is shown to be the technologically-maximal level, which maximizes the difference between the quality of the legal and pirated goods. However, when a seller can price-discriminate, it is always optimal for them to choose a strictly lower level of technology-based protection. Moreover, if a DRM system weakens over time, due to its technology being progressively hacked, the optimal strategic response may involve either increasing or decreasing the level of technology-based protection and the corresponding prices. This direction of change is related to whether the technology implementing each marginal reduction in piracy is increasingly less or more vulnerable to hacking. Pricing and technology choice guidelines based on these results are presented, some social welfare issues are discussed, and ongoing work on the role of usage externalities in pricing and protection is outlined

Suggested Citation

  • Arun Sundararajan, 2003. "Managing Digital Piracy: Pricing, Protection and Welfare," Law and Economics 0307001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwple:0307001
    Note: Type of Document - PDF; prepared on Windows NT; pages: 40 ; figures: included
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    References listed on IDEAS

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    1. Takeyama, Lisa N, 1994. "The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 155-166, June.
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    5. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, University Library of Munich, Germany.
    6. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Industrial Organization 0307002, University Library of Munich, Germany.
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    8. Arun Sundararajan, 2003. "Network Effects, Nonlinear Pricing and Entry Deterrence," Working Papers 03-17, New York University, Leonard N. Stern School of Business, Department of Economics.
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    Citations

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    Cited by:

    1. Ram D. Gopal & Alok Gupta, 2010. "Trading Higher Software Piracy for Higher Profits: The Case of Phantom Piracy," Management Science, INFORMS, vol. 56(11), pages 1946-1962, November.
    2. Ünlü, Vural & Hess, Thomas, 2003. "The optimal level of technical copyright protection: A game-theoretic approach," Working Papers 9/2003, University of Munich, Munich School of Management, Institute for Information Systems and New Media.
    3. Timothy Cronan & Sulaiman Al-Rafee, 2008. "Factors that Influence the Intention to Pirate Software and Media," Journal of Business Ethics, Springer, vol. 78(4), pages 527-545, April.
    4. Gokhan Ozertan & Baris Cevik, 2008. "Pricing Strategies and Protection of Digital Products Under Presence of Piracy: A Welfare Analysis," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 11(4), pages 1-1.
    5. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2013. "The Interaction between Private and Public IPR Protection in a Software Market: A Positive and Normative Analysis," CERGE-EI Working Papers wp490, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Kartik Hosanagar & John Chuang & Ramayya Krishnan & Michael D. Smith, 2008. "Service Adoption and Pricing of Content Delivery Network (CDN) Services," Management Science, INFORMS, vol. 54(9), pages 1579-1593, September.
    7. Atanu Lahiri & Debabrata Dey, 2013. "Effects of Piracy on Quality of Information Goods," Management Science, INFORMS, vol. 59(1), pages 245-264, June.
    8. Tanmoyee Banerjee (Chatterjee) & Nilanjana Biswas( Mitra), 2013. "Product Quality in the presence of Network Externality and Commercial Piracy," Economics Bulletin, AccessEcon, vol. 33(4), pages 3006-3013.
    9. repec:pal:jorsoc:v:60:y:2009:i:3:d:10.1057_palgrave.jors.2602552 is not listed on IDEAS
    10. Sanjay Jain, 2008. "Digital Piracy: A Competitive Analysis," Marketing Science, INFORMS, vol. 27(4), pages 610-626, 07-08.
    11. Anindya Ghose & Arun Sundararajan, 2005. "Versioning and Quality Distortion in Software? Evidence from E-Commerce Panel Data," Working Papers 05-14, NET Institute, revised Oct 2005.
    12. Jin-Hyuk Kim, 2008. "Digital Rights Management and Technological Tying," Working Papers 08-05, NET Institute, revised Sep 2008.
    13. Kresimir Zigic & Jiri Strelicky & Michael Kunin, 2015. "Modeling Software Piracy Protection: Monopoly versus Duopoly," CERGE-EI Working Papers wp551, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    14. Joan Calzada & Tommaso M. Valletti, 2012. "Intertemporal Movie Distribution: Versioning When Customers Can Buy Both Versions," Marketing Science, INFORMS, vol. 31(4), pages 649-667, July.
    15. Jin-Hyuk Kim & Tin Cheuk Leung, 2013. "Quantifying the Impacts of Digital Rights Management and E-Book Pricing on the E-Book Reader Market," Working Papers 13-03, NET Institute.
    16. Dirk Bergemann & Thomas Eisenbach & Joan Feigenbaum & Scott Shenker, 2005. "Flexibility as an Instrument in Digital Rights Management," Cowles Foundation Discussion Papers 1505, Cowles Foundation for Research in Economics, Yale University.
    17. Anindya Ghose & Arun Sundararajan, 2006. "Evaluating Pricing Strategy Using e-Commerce Data: Evidence and Estimation Challenges," Papers math/0609170, arXiv.org.
    18. Hemant K. Bhargava & Vidyanand Choudhary, 2008. "Research Note--When Is Versioning Optimal for Information Goods?," Management Science, INFORMS, vol. 54(5), pages 1029-1035, May.
    19. Shariffah Zamoon & Shawn Curley, 2008. "Ripped from the Headlines: What can the Popular Press Teach us about Software Piracy?," Journal of Business Ethics, Springer, vol. 83(3), pages 515-533, December.

    More about this item

    Keywords

    digital piracy; digital rights management; DRM; information goods; nonlinear pricing; screening; type-dependent participation constraints; copyright; IP; intellectual property;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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