Economics of Ransomware Attacks
Earlier Version Presented at WISE 2017 and CIST 2018
80 Pages Posted: 3 Apr 2019
Date Written: March 12, 2019
Over the last few years, both the development of ransomware strains as well as changes in the marketplace for malware have greatly reduced the entry barrier for attackers to conduct large-scale ransomware attacks. In this paper, we examine how this mode of cyberattack impacts software vendors and consumer behavior. When victims face an added option to mitigate losses via a ransom payment, both the equilibrium market size and the vendor's profit under optimal pricing can actually increase in the ransom demand as well as the risk of residual losses following a ransom payment (which reflect the trustworthiness of the ransomware operator). We further show that for intermediate levels of risk of the vulnerability being successfully exploited, the vendor restricts software adoption by substantially hiking prices. This lies in stark contrast to outcomes in a benchmark case involving traditional malware (non-ransomware) where the vendor will choose to decrease price as security risk increases. Social welfare is higher under ransomware compared to the benchmark in both sufficiently low and high risk settings. However, for intermediate risk, it is better from a social standpoint if consumers do not to have an option to pay ransom. We also show that the expected total ransom paid is non-monotone in the risk of success of the attack, increasing when the risk is moderate in spite of a decreasing ransom-paying population.
Keywords: software security, software patching, ransomware, security attacks, network externalities
JEL Classification: L86, L19, D11, D40
Suggested Citation: Suggested Citation