Competition Against Peer-to-Peer Networks

Abstract:     
In this paper, we consider the competition of providers of information products against P2P networks that offer illegal versions of the information products. Depending on the generic cost factor of downloading — incorporating factors including, among other things, the degree of legal enforcement of intellectual property rights — we find that the firm may employ pricing strategies to either deter the entry of a network or to accommodate it. In the latter case, we find that the equilibrium price moves in the opposite direction of the generic cost factor of downloading. This counter-intuitive result corresponds to a very subtle form of platform competition between the firm and the network. Furthermore, profits for the firm unambiguously decrease when the generic cost factor of downloading declines, whereas total welfare unambiguously increases. This implies that it may well be welfare enhancing to relax the legal enforcements of intellectual property rights.

Number of Pages in PDF File: 35

Keywords: information products, the music industry, piracy, P2P (peer-to-peer) filesharingnetworks, network externalities, limit pricing, multi-platform competition

JEL Classification: L11, L82, L86

working papers series