Economics of Ransomware Attacks

Earlier Version Presented at WISE 2017 and CIST 2018

80 Pages Posted: 3 Apr 2019

See all articles by Terrence August

Terrence August

University of California, San Diego (UCSD) - Rady School of Management

Duy Dao

University of Calgary - Haskayne School of Business

Marius Florin Niculescu

Georgia Institute of Technology - Scheller College of Business

Date Written: March 12, 2019

Abstract

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

August, Terrence and Dao, Duy and Niculescu, Marius Florin, Economics of Ransomware Attacks (March 12, 2019). Earlier Version Presented at WISE 2017 and CIST 2018. Available at SSRN: https://ssrn.com/abstract=3351416 or http://dx.doi.org/10.2139/ssrn.3351416

Terrence August

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://management.ucsd.edu/faculty/directory/august/

Duy Dao (Contact Author)

University of Calgary - Haskayne School of Business ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Marius Florin Niculescu

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-385-3105 (Phone)

HOME PAGE: http://scheller.gatech.edu/directory/faculty/niculescu/index.html

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