Piracy prevention and the pricing of information goods

Abstract

This paper develops a simple model of piracy to analyze its effects on prices and welfare and to study the optimal enforcement policy. A monopolist produces an information good (involving a "large" development cost and a "small" reproduction cost) that is sold to two groups of consumers differing in their valuation of the good. We distinguish two settings: one in which the monopoly is regulated and one in which it maximizes profits and is not regulated, except that the public authority may be responsible for the control of piracy. We show that copying or piracy might be welfare enhancing because it is a way to "provide" the good to some individuals (those with a low willingness to pay) without undermining the firm's ability to finance the development cost via the pricing scheme applied to high valuation consumers. The level of piracy control differs according to the regulatory environment. Three levels of piracy control emerge. The highest is the one chosen by the private monopoly. The next level is the one chosen by the regulated monopoly. The lowest, that can be zero, is the level of control chosen by the public authority when the good is sold (and priced) by a private monopoly.JEL classification: L11, L86, D82

Versioning of information goods under the threat of piracy

“…In short, the two studies address different situations: Yoon (2002) focuses on the relation between copyright protection and the usage of protected goods, while we focus on the relation between copyright protection and the quality of protected goods. Cremer and Pestieau (2009) also study the effect of piracy on welfare and determine the optimal enforcement policy. They assume that a monopolist sells an information good at a nonlinear price for two versions designed for two types of consumers with different levels of willingness to pay as in our model.…”

Pricing Information Goods with Piracy and Heterogeneous Consumers

“…Very high piracy rates are bad for everyone. We believe that our recognition of contradictory dynamic effects is a novel addition to the literature on welfare trade-offs due to piracy (Johnson, 1985;Novos and Waldman, 1984;Yoon, 2002;Belleflamme, 2002;Cremer and Pestieau, 2009). …”

“…Johnson (1985), Novos and Waldman (1984), and Yoon (2002) allow for the possibility that pirate copies may be more inefficient in production but change market access through lower purchase costs. Short term welfare increases from expanded use but reduced long term welfare from legal production disincentivisation is examined in Belleflamme (2002) and Cremer andPestieau (2009). Takeyama (1994) consider welfare changes when piracy can expand user networks.…”

Digital piracy: Price-quality competition between legal firms and P2P network hosts

“…and its market structure (monopoly, competitive, etc.). Nonetheless, literature has emerged to identify the effects of piracy regulation and protection on profit and welfare (see, e.g., Conner and Rumelt, 1991;Yoon, 2002;Bae and Choi, 2006;Wu and Chen, 2008;Cremer and Pestieau, 2009;Harbaugh and Khemka, 2010). Much of the counterfeit literature has implications for online piracy; however including the nuisances of P2P networks adds additional complexity.…”