Turning Piracy into Profits: a Theoretical Investigation

• Published in: Information economics and policy Vol. 22; no. 4; pp. 379 - 390
• Main Authors: Minniti, Antonio, Vergari, Cecilia
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.12.2010; Elsevier; Elsevier Sequoia S.A
• Series: Information Economics and Policy
• Subjects: Consumer behaviour; Copyright; Digital technology; Duopoly; Economic models; File sharing; File-sharing community; File-sharing community Piracy Linear Spatial Model; Free riding; Information and communication technologies; Intellectual property rights; Law enforcement; Leisure industry; Linear Spatial Model; Peer to peer computing; Piracy; Profit margins; Profitability; Studies; O34; Linear Spatial Model; L86; L1; Piracy; File-sharing community
• ISSN: 0167-6245; 1873-5975
• DOI: 10.1016/j.infoecopol.2010.06.001

We analyse how the presence of a (private, small-scale) file-sharing community affects the profitability of producers of digital goods within a spatial duopoly model à la Hotelling (1929). Consumers can download pirated content by joining this file-sharing network. To gain access to the community, consumers have to buy and share a digital good with other members. We show that firms benefit from piracy in emerging markets, that is, markets that are not fully covered. The activity of file-sharing, in fact, allows firms to reach a larger share of customers who otherwise would not buy at all. This effect is missing in mature and widespread markets where firms prefer to be protected from piracy. Our results provide a rationale for the observation that in emerging countries, companies are unlikely to take a firm stance against piracy.