Piracy Accommodation and the Optimal Timing of Royalty Payments

18 Pages Posted: 11 Jun 2008 Last revised: 15 Jun 2008

Alan E. Woodfield

University of Canterbury - Economics and Finance

Abstract

This paper generalizes the two-period model of Watt (2000) who demonstrates the possibility of optimal accommodation of a pirate when the royalty rate applying to a creation is uniform and second-period Cournot competition applies. Admitting nonlinear contracts with period-specific royalty rates that leave total payments unchanged, simulation analysis shows that a producer of originals does better to increase the royalty rate in period 1 and decrease the rate to a negative level in period 2, thereby more than offsetting the usual cost advantage available to a pirate. Watt's illustrative examples regarding piracy accommodation (but not piracy exclusion) are overturned when a nonlinear contract is chosen optimally, although accommodation remains optimal in some other cases. Further, where exclusion is impossible under uniform royalties, cases exist where exclusion is feasible under nonlinear royalties. Even so, accommodation may be a preferable strategy.

Keywords: Piracy, Timing, Royalty

Suggested Citation

Woodfield, Alan E., Piracy Accommodation and the Optimal Timing of Royalty Payments. Review of Economic Research on Copyright Issues, Vol. 3, No. 1, pp. 43-60, 2006. Available at SSRN: https://ssrn.com/abstract=1143842

Alan E. Woodfield (Contact Author)

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Paper statistics

Downloads
25
Abstract Views
323