Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets

Abstract

Digital goods lend themselves to versioning but also suffer from piracy losses. This paper develops a pricing model for digital experience goods in a segmented market and explores the optimality of sampling as a piracy-mitigating strategy. Consumers are aware of the true fit of an experience good to their tastes only after consumption, and as piracy offers an additional (albeit illegal) consumption opportunity, traditional segmentation findings from economics and sampling recommendations from marketing, need to be revisited. We develop a two-stage model of piracy for a market where consumers are heterogeneous in their marginal valuation for quality and their moral costs. In our model, some consumers pirate the product in the first stage allowing them to update their fit-perception that may result in re-evaluation of their buying/pirating decision in the second stage. We recommend distinct pricing and sampling strategies for underestimated and overestimated products and suggest that any potential benefits of piracy can be internalized through product sampling. Two counterintuitive results stand out. First, piracy losses are more severe for products that do not live up to their hype rather than for those that have been undervalued in the market, thus requiring a greater deterrence investment for the former, and second, unlike physical goods where sampling is always beneficial for underestimated products, sampling for digital goods is optimal only under narrowly defined circumstances due to the price boundaries created by both piracy and segmentation.

Managing Digital Piracy: Pricing and Protection

“…More recently, Belleflamme (2003) studies the interdependence between different producers' incentives to accommodate/deter the presence of a pirated good. Chellappa and Shivendu (2003) model sampling and pricing in the presence of a pirated good derived from an evaluation version of the legal good. The model in this paper builds on the approach of each these papers, by preserving their notion of the pirated good as an inferior (vertically differentiated) substitute for the legal good, a model on which many prior IS papers are based (for instance, Nault 1997).…”

Are Digital Rights Valuable? Theory and Evidence from Ebook Pricing

“…Evidently, θ T D (y) and y T D also depends on p T and s D , though, to keep our equations more readable, we do not include these as arguments 6 .…”

Versioning and Quality Distortion in Software? Evidence from E-Commerce Panel Data

“…Equations (7)(8) indicate that the seller will o¤er two versions so long as the di¤erence between the quality preferences of the two types is not too large, and there is a su¢ cient fraction f 2 of lower type customers. Notice that the ‡agship version is assigned the socially optimal quality level, while the quality of the lower version is distorted downwards.…”

“…Given a set of price data for each of the versions of a software product, one needs estimates of each of the i and f i parameters in order to use equations (7)(8) or (15)(16)(17) to compute these quality ratios.…”

“…Notice that, given prices and the f i =f j ratios, (18)(19)(20) is a system of 3 equations in three unknowns. These estimates can then be used in equations (15)(16)(17) or in equations (7)(8) to estimate the quality degradation associated with versions of the software title.…”