Peer-to-Peer File Sharing and the Market for Digital Information Goods
44 Pages Posted: 13 Dec 2006 Last revised: 15 Mar 2009
Date Written: March 11, 2009
We study competitive interaction between two alternative models of digital content distribution over the Internet: peer-to-peer (p2p) file sharing and centralized client-server distribution. We present microfoundations for a stylized model of p2p file sharing where all peers are endowed with standard preferences and show that the endogenous structure of the network is conducive to sharing by a significant number of peers, even if sharing is costlier than freeriding. We build on this model of p2p to analyze the optimal strategy of a profit-maximizing firm, such as Apple, that offers content available at positive prices. We characterize the size of the p2p network as a function of the firm's pricing strategy, and show that the firm may be better off setting high prices, allowing the network to survive, and that the p2p network may work more efficiently in the presence of the firm than in its absence.
Keywords: Peer-to-Peer, Congestion, Mixed Duopoly
JEL Classification: C72, D42, D71, L1, L96
Suggested Citation: Suggested Citation