Network Effects, Income and Piracy
20 Pages Posted: 14 Nov 2009
Date Written: November 11, 2009
This study builds a model which explains how income differences among countries affect differences of software piracy rate in the presence of network effects. For the model analysis, critical mass and maximum sustainable price, which indicate respectively the quantity demanded and the price at the maximum of the inverted U-shape demand curve of network good, are employed. First, we investigate income effect on the demand curve of the network good using comparative static analysis. As a result, a country which has a higher maximum income level has a higher critical mass and higher maximum sustainable price. Second, we examine how critical mass is affected by piracy. Our preliminary analysis indicates that higher piracy rates lead to smaller levels of critical mass and higher sustainable prices. Hence, allowing some level of piracy may help network goods survive in developing countries.
Keywords: network effects, critical mass, income, piracy
JEL Classification: L1, O34, L86
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