Impact of Piracy on Innovation at Software Firms and Implications for Piracy Policy

A Business software alliance (BSA) commissioned study in 2006, found that $34 billion was lost due to piracy of software in 2005. The BSA and its members invest significant resources in educating users about copyright, its value, and enforcing copyright laws. However, does effort spent in educating users about the harmful aspects of piracy, and taking action against end-users using pirated software always result in higher quality software? In this paper, we look at how innovation in the presence of piracy is affected by the policy choice of alliances such as the BSA. Surprisingly, we find that a stricter piracy policy, that increases the perceived cost to using pirated software for end-users, may in some cases lead to an increase in piracy (demand for pirated products), and a decrease in product quality. Thus an active BSA that tries to educate consumers and takes legal action against consumers, may actually be promoting piracy and hurting innovation in some cases. An intuitive rationale for this is that, in some regions, quality choice by the firm and the policy choice by the BSA are strategic substitutes in the fight against piracy. Thus an increase in the policy variable by the BSA, makes the firm choose a lower quality. Depending on the likelihood that the pirated product is functional, the BSA would choose a piracy policy ranging from an inactive to a very active policy

Risk of Using Pirated Software and its Impact on Software Protection Strategies

The software protection strategy of software developer and the inherent risk to end user in using pirated software are two major factors that affect a user’s decision on whether to purchase or pirate a software product. This paper analyzes the optimal protection strategy for software developer in horizontally and vertically differentiated markets. We find that the implementation cost of software protection constitutes the primary factor for software developers to determine their software protection strategies. However, in a vertically differentiated market, the lower quality product should always adopt a non-protection strategy, regardless of the protection implementation cost. In other cases, protection would only be optimal if the protection implementation cost to the software developer is relatively small. These findings are consistent with anecdotal evidence

Piracy on file-sharing networks: strategies for recording companies

In this article, we study the impact on piracy of selling music as downloadable files and the strategies that recording companies should adopt to increase profits. We find that total music sales and profits of firm (recording company) are higher, and total piracy (demand on file-sharing networks) is lower when the firm sells a downloadable version of a music track. We also look at the firm's optimal level of digital rights management (DRM) protection. We found that revenue decreases with increased protection. It is therefore optimal for the firm not to employ any DRM protection in the absence of network externality (NE). Listening to music or watching videos protected by DRM is cumbersome to users because they have to download license files and there are restrictions on the number of times the file can be copied and on the type of devices that can play the file. As a result, DRM protection is a disutility to the legal consumer and the firm must charge lower prices with more DRM protection. When NE is high and a nominal search cost is above a certain threshold, then non-zero protection becomes optimal

Essays on privacy and the value of information in adverse selection markets

This dissertation seeks to address the sharp increase in public debate about privacy issues, particularly on the issues of Internet privacy, genetic information privacy and the value of personal information, in markets exhibiting adverse selection. The dissertation is divided into three essays. All essays deal with the value of personal information—browsing behavior or genetic information—to firms, and the inherent loss of privacy of the consumer, associated with the release of this information. The first essay looks at privacy in the context of the Internet. The collection of browsing behavior, and forming consumer profiles based on the collected information, is useful to firms, who want to target consumers with a personalized product or service. At the same time, there is an inherent disutility to the consumer because of the collection of browsing behavior and the consequent loss of privacy. We study mechanisms that compensate consumers for their loss of privacy, thus allowing for a better match between personalized products and consumers. In the second essay we study the efficiency implications of privacy laws, on markets that enable trade in personal information. We create an experimental market populated with human agents and artificial agents, who trade in personal information. The setting allows us to test the theoretical predictions obtained in the first essay experimentally. It also allows us to study the impact of stricter privacy regimes on sellers profits, consumer surplus and overall efficiency. The third essay looks at privacy in the context of genetic testing. We study the impact of genetic testing, on a health insurance market. We characterize the existence and nature of insurance contracts when the individual can consent to revealing information, but where the revelation of genetic information is associated with a loss of privacy. We then examine the welfare implications of different policy proposals regarding genetic testing, with the decision of the consumer to take a genetic test and to reveal genetic information, being endogenous