Strategic Piracy Management for Digital Products

Abstract

The purpose of this paper is to investigate how different types of strategic interactions between two firms affect their optimal pricing and private copy protection levels of digital products. In our model, the firms do not directly interact with each other in terms of prices, but they become interdependent through private copy protection levels. Our analysis shows that 1) stronger public copy protection leads to lower private copy protection and more piracy when the firms regard their private copy protection levels as "strategic substitutes," but higher private copy protection and less piracy when they treat their private copy protection levels as "strategic complements" and 2) more compatibility between private copy protection systems leads to lower private copy protection and more piracy. We also discuss public policy issues regarding these findings.

Keywords: digital rights management, copyright protection, piracy, strategic substitutes, strategic complements

JEL Classification: L13, L82, L86, O34