IPRIA Working Paper Series
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Intellectual Property Research Institute of Australia Working Paper No. 03/2002 Network Externalities and the Myth of Profitable Piracy by Stephen P. King and Ryan Lampe Date: September 2002 Abstract: Recent papers have argued that a firm might be able to raise its profit by allowing some customers to steal its product. In particular, with network externalities, so that customers value the product more highly the more widely the product is used, it is claimed that piracy can be profitable. In this paper we analyze these claims when the producer can freely choose the degree of piracy prevention. We show that piracy can never be profitable if the producer can directly price discriminate between potential-pirates and other customers. In the absence of price discrimination, piracy will only raise profits when the ability to pirate is inversely related to customer willingness-to-pay. Even in this situation, there is no profit maximizing equilibrium where some potential pirates buy while others pirate the product. Thus, even though potential pirates differ in their ability to illegally gain the product, the profit maximizing outcome involves either no piracy or complete piracy. Downloads: PDF [755K] |
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