A Strategic Approach to Software Protection*

TLDR

Network effects increase software attractiveness, allowing firms to raise prices, but also intensify competition for market share. The paper shows that software firms strategically follow consumers' preference to drop software protection. The authors analyze software protection policies in a price‑setting duopoly of differentiated software, where consumer preference depends on how many others use the software. When network effects are strong, unprotecting becomes an equilibrium in a noncooperative industry.

Abstract

This paper demonstrates that there is a strategic reason why software firms have followed consumers' desire to drop software protection. We analyze software protection policies in a price‐setting duopoly software industry selling differentiated software packages, where consumers' preference for particular software is affected by the number of other consumers who (legally or illegally) use the same software. Increasing network effects make software more attractive to consumers, thereby enabling firms to raise prices. However, it also generates a competitive effect resulting from feircer competition for market shares. We show that when network effects are strong, unprotecting is an equilibrium for a noncooperative industry.