Software Piracy: An Analysis of Protection Strategies

TLDR

Software piracy is widely believed to hurt firms by reducing profits and consumers by raising prices, so perfect, costless protection is thought to benefit both parties. The model links piracy’s increase in total users with a positive network externality that reduces consumers’ post‑purchase learning and customization costs. The analysis shows that, in some cases, foregoing protection can raise firm profits and lower selling prices even when piracy is substantial.

Abstract

Software piracy by users is generally believed to harm both software firms (through lower profits) and buying customers (through higher prices). Thus, it is thought that perfect and costless technological protection would benefit both firms and consumers. The model developed here suggests that in some circumstances, even with significant piracy, not protecting can be the best policy, both raising firm profits and lowering selling prices. Key to the analysis is joining the presence of a positive network externality with the fact that piracy increases the total number of program users. The network externality exists because consumers have an incentive to economize on post-purchase learning and customization costs.