Can Piracy Increase Innovation? Software Firms' Responses to Online File Sharing

57 Pages Posted: 6 Aug 2019 Last revised: 7 Jul 2020

See all articles by Wendy A. Bradley

Wendy A. Bradley

Southern Methodist University (SMU) - Strategy & Entrepreneurship Department

Julian Kolev

Southern Methodist University (SMU) - Strategy & Entrepreneurship Department

Date Written: July 2020

Abstract


Existing theory predicts two possible and opposing competitive responses by firms to digital
piracy, resulting in an ambiguous impact on innovation. We resolve this tension by using a natural
experiment stemming from a shock to file-sharing technology, which led to a sudden increase in
piracy in the early 2000's, to analyze the impact of piracy on innovation in the software industry.
Using difference-in-differences and instrumental-variables estimators to compare a treatment
group of consumer-focused software firms with a matched control group of enterprise-focused
software firms, we find that piracy led to an increase in subsequent R&D spending, copyrights,
trademarks, and patents for large, incumbent firms. However, we find that firms decreased their
rate of new product releases following the rise in piracy. We conclude that piracy pushes firms to
develop new products that are superior to those available as pirated substitutes, but this innovation
may reach the public at a slower pace. Our findings have implications for managers pursuing value
appropriation in knowledge-based industries while faced with the threat of digital piracy.

Keywords: piracy, software, innovation, intellectual property

JEL Classification: O32, O33, O34, D23

Suggested Citation

Bradley, Wendy and Kolev, Julian, Can Piracy Increase Innovation? Software Firms' Responses to Online File Sharing (July 2020). SMU Cox School of Business Research Paper No. 19-12, TPRC47: The 47th Research Conference on Communication, Information and Internet Policy 2019, Available at SSRN: https://ssrn.com/abstract=3427375 or http://dx.doi.org/10.2139/ssrn.3427375

Wendy Bradley (Contact Author)

Southern Methodist University (SMU) - Strategy & Entrepreneurship Department ( email )

6212 Bishop Blvd.
Dallas, TX 75205
United States

HOME PAGE: http://https://www.smu.edu/cox/Our-People-and-Community/Faculty/Wendy-Bradley

Julian Kolev

Southern Methodist University (SMU) - Strategy & Entrepreneurship Department ( email )

United States

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