Effects of Piracy on Quality of Information Goods

Management Science, Vol. 59, No. 1, January 2013, pp. 245-264

Posted: 22 Jun 2011 Last revised: 6 Feb 2013

Atanu Lahiri

University of Texas, Dallas - Jindal School of Management

Debabrata Dey

University of Washington - Michael G. Foster School of Business

Abstract

It is commonly believed that piracy of information goods leads to lower profits, which translate to lower incentives to invest in innovation, and eventually to lower quality products. Manufacturers, policy makers, and researchers, all claim that inadequate piracy enforcement efforts translate to lower investments in product development. However, we find many practical examples that contradict this claim. Therefore, to examine this claim more carefully, we develop a rigorous economic model of the manufacturer's quality decision problem in the presence of piracy. We consider a monopolist who does not have any marginal costs but has a product development cost quadratic in the quality level produced. The monopolist faces a consumer market heterogeneous in its preference for quality and offers a quality level that maximizes its profit. We also allow for the possibility that the manufacturer may use versioning to counter piracy. We unexpectedly find that in certain situations, lower piracy enforcement increases the monopolist's incentive to invest in quality. We explain the reasons and welfare implications of our findings.

Keywords: Piracy, quality, pricing, information good, versioning

Suggested Citation

Lahiri, Atanu and Dey, Debabrata, Effects of Piracy on Quality of Information Goods. Management Science, Vol. 59, No. 1, January 2013, pp. 245-264. Available at SSRN: https://ssrn.com/abstract=1868659 or http://dx.doi.org/10.2139/ssrn.1868659

Atanu Lahiri (Contact Author)

University of Texas, Dallas - Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Debabrata Dey

University of Washington - Michael G. Foster School of Business ( email )

Seattle, WA 98195-3226
United States
206-543-1855 (Phone)
206-543-3968 (Fax)

HOME PAGE: http://faculty.washington.edu/ddey/

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