Versioning Strategy of Information Goods with Network Externality in the Presence of Piracy (original) (raw)
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Versioning of information goods under the threat of piracy
Information Economics and Policy, 2010
The present study investigates the effects of piracy on the quality decisions of a firm that produces two versions of an information good: that is, one version for a consumer with a high willingness to pay and a second version for a consumer with a low willingness to pay. On the assumption that there is no quality difference between the original and the illegal copy and that the cost of the copy is constant across users, we show that the presence of piracy induces the firm to choose a lower level of quality of the former and a higher level of quality of the latter relative to decisions made in the absence of piracy. We also discuss policy implications concerning the socially optimal level of copyright protection.
Effects of Piracy on Quality of Information Goods
Management Science, 2013
It is commonly believed that piracy of information goods leads to lower profits, which translate to lower incentives to invest in innovation, and eventually to lower quality products. Manufacturers, policy-makers, and researchers, all claim that inadequate piracy enforcement efforts translate to lower investments in product development. However, we find many practical examples that contradict this claim. Therefore, in order to examine this claim more carefully, we develop a rigorous economic model of the manufacturer's quality decision problem in the presence of piracy. We consider a monopolist, who does not have any marginal costs, but has a product development cost that is quadratic in the quality level produced. The monopolist faces a consumer market that is heterogeneous in its preference for quality, and offers a quality level that maximizes its profit. We also allow for the possibility that the manufacturer may use versioning to counter piracy. We unexpectedly find that, in certain situations, a lower piracy enforcement increases the monopolist's incentive to invest in quality. We explain the reasons and welfare implications of our findings.
Piracy prevention and the pricing of information goods
Information Economics and Policy, 2009
This paper develops a simple model of piracy to analyze its effects on prices and welfare and to study the optimal enforcement policy. A monopolist produces an information good (involving a "large" development cost and a "small" reproduction cost) that is sold to two groups of consumers differing in their valuation of the good. We distinguish two settings: one in which the monopoly is regulated and one in which it maximizes profits and is not regulated, except that the public authority may be responsible for the control of piracy. We show that copying or piracy might be welfare enhancing because it is a way to "provide" the good to some individuals (those with a low willingness to pay) without undermining the firm's ability to finance the development cost via the pricing scheme applied to high valuation consumers. The level of piracy control differs according to the regulatory environment. Three levels of piracy control emerge. The highest is the one chosen by the private monopoly. The next level is the one chosen by the regulated monopoly. The lowest, that can be zero, is the level of control chosen by the public authority when the good is sold (and priced) by a private monopoly.
Anti-piracy policy and quality differential in markets for information goods
2011
In this paper we analyze the strategic decisions of the government, the incumbent and the pirate in a market where the good is piratable. We show that deterred or accommodated piracy can occur in equilibrium, but pure monopoly cannot occur for any anti-piracy policy. We also show that the initial quality differential between the original and the pirated product is essential to explain the effects of an increase in the quality of pirated product on both the level of piracy and the optimal monitoring rate. Assuming a onestage entry process and a sufficiently high quality differential, we prove that the incumbent always prefers to move first and make a credible commitment to a price. However, this is not true with a two-stage entry process.
Versioning in the Information Economy: Theory and Applications
Cesifo Economic Studies, 2005
Price discrimination consists in selling the same product to different buyers at different prices. When sellers cannot relate a buyer's willingness to pay to some observable characteristics, price discrimination can be achieved by targeting a specific package (i.e., a selling contract that includes various clauses in addition to price) for each class of buyers. The seller faces then the problem of designing the menu of packages in such a way that each consumer indeed chooses the package targeted for her. This practice, known as versioning (or as second-degree price discrimination), is widespread in the information economy. In this paper, we propose a simple unified framework to study the general theory behind versioning and to consider a number of specific versioning strategies used in the information economy (namely, bundling, functional degradation and conditioning prices on purchase history). (JEL L82, L86, K11, O34)
Pricing information goods in the presence of copying
2002
The e¤ects of piracy on the pricing behavior of producers of information goods is studied within a uni…ed model à la . When the copying technology involves a marginal cost and no …xed cost, producers act independently. In this simple framework, we highlight the trade-o¤ between ex ante and ex post e¢ciency considerations (how to provide the right incentives to create whilst limiting monopoly distortions?). When the copying technology involves a …xed cost and no marginal cost, pricing decisions are interdependent. We investigate the strategic pricing game by focussing on some signi…cant symmetric Nash equilibria.
Vertically Di fferentiated Information Goods: Monopoly Power Through Versioning
SSRN Electronic Journal, 2008
In this paper we analyze price, quality and versioning strategies that information goods producers use to deter entry and maintain market power. We find that under competition, firms provide higher quality information goods with a better "price-quality ratio" than in monopoly. In a Stackelberg game, the leader firm that provides the high quality information good decreases its quality level to maintain a first mover advantage. We also show that a monopolist can implement versioning strategies in the low-end market to deter entry, and different versions exist as a signal to prevent potential entry. A vertically differentiated market is often referred to as a "natural oligopoly" for traditional goods, whereas it can be regarded as a "natural monopoly" for information goods.
Versioning and Information Dissemination: A New Perspective
Social Science Research Network, 2017
That versioning can be effective for information goods is well known. In particular, related literature shows that when consumers underestimate a product, it is often better for the manufacturer to offer a base version of the product along with the fully featured version. This is because the base version lets consumers discover their true valuations, allowing the manufacturer to set a high price for the full version. This finding is also consistent with broader literature in economics, which contends that informing consumers cannot be optimal unless doing so also improves their average willingness to pay. Absent any such upward revision, keeping consumers in the dark becomes profitwise equivalent to first-degree price discrimination. This equivalence, although correct, does not hold when a fraction of consumers are fully aware of the true valuation to begin with. Accordingly, we propose a new perspective and explain why a manufacturer should consider versioning even when consumers do not underestimate the product and their average willingness to pay does not change after exposure to it. The point of this paper is to show that the presence of an informed segment of consumers fundamentally changes the information structure of the market, elevating in the process the relative value of information dissemination.
Containing piracy with product pricing, updating and protection investments
International Journal of Production Economics, 2013
We consider a monopolistic producer offering software that is updated periodically, but, by the end of one period, a pirated version is available at a transaction cost. This presents the consumers, who are different in terms of their willingness to pay for the original compared to the pirated version, with possible strategies for either buying a new product or pirating it. We address pricing and protection investment strategies to regain the profits affected by the piracy. In particular, we find that even when the transaction cost is exogenous, the producer does not necessarily want to fully price out the piracy. The decisive factor in such a case is the level of product newness relative to the transaction cost. If the producer is able to achieve high newness for the updated product relative to the transaction cost, then a high retail price ensures that he will gain the largest profit possible even though some of the demand will be lost due to piracy. On the other hand, when the transaction cost is endogenous, the producer may have two alternatives, in terms of profit, for dealing with the piracy-pricing the software out or investing heavily in software protection. As newness levels rise, the option of pricing out the piracy becomes increasingly preferable.
Journal of Economics & …, 2007
The effects of (private, small-scale) piracy on the pricing behavior of producers of information goods are studied within a unified model of vertical differentiation. Although information goods are assumed to be perfectly differentiated, demands are interdependent because the copying technology exhibits increasing returns to scale. We characterize the Bertrand-Nash equilibria in a duopoly. Comparing equilibrium prices to the prices set by a multiproduct monopolist, we show that competition drives prices up and may lead to price dispersion. Competition reduces total surplus in the short run but provides higher incentives to create in the long run.