Digital Piracy and Bundling of Information Goods
47 Pages Posted: 1 Apr 2019 Last revised: 9 Apr 2020
Date Written: April 8, 2020
Bundling of information goods is quite common. According to prior research, bundling is particularly profitable for such goods because their marginal production cost is zero. However, zero marginal cost is not the only relevant trait. For example, information goods are known to be prone to piracy, and it is still not clear what impact, if any, piracy can have on the appeal of bundling. To address this, we reexamine bundling in the backdrop of piracy. We find that piracy diminishes the appeal of bundling to the extent that selling separately may become optimal despite zero marginal cost. We explain the reasons and implications of this finding as well as demonstrate its generalizability. Interestingly, when product valuations are negatively correlated and bundling is anticipated to be even more effective, separate selling can still be optimal in the presence of piracy. The impact of piracy is also noticeable in situations where a fraction of the users are ethical and do not consider piracy to be an option. Furthermore, piracy elevates the relative appeal of separate selling so much so that even mixed bundling becomes ineffective in certain situations. Collectively, our results point to the insight that the purported benefits of bundling may not fully materialize in the presence of piracy.
Keywords: Information goods, piracy, pricing, bundling
Suggested Citation: Suggested Citation