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Abstract

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.

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... Most of this research, however, focuses on monopoly cases, and only a handful of studies address duopoly cases (Belleflamme and Picard, 2007;Johnson, 1985;Park and Scotchmer, 2005). Given the observation that only a small number of large companies dominate the industries involving digital products, duopoly setup makes more sense than monopoly setup. ...
... Even, those studies with duopoly settings do not factor DRM into analysis properly. Belleflamme and Picard (2007) and Park and Scotchmer (2005) model duopoly settings, focusing only on pricing, rather than addressing both DRM and pricing for digital goods providers. Since DRM is one of the central issues in piracy, it is more reasonable to treat DRM as a decision variable, rather than a parameter. ...
... The first term in equations (A1) to (A5) represents the demand switch effect between legal and illegal copies, which induces welfare gain or loss depending on the direction of demand switches. One distinctive feature is that the demand switch effect is a sum of the direct effect, which has been discussed in the previous literature (e.g., Bae and Choi, 2006;Belleflamme and Picard, 2007), and the indirect effect which shows how the marginal increase in protection affects the private incentive of firms to protect their own products through ...
Article
The purpose of this paper is to investigate how different types of demand structure affect firms' optimal pricing and private copy protection (DRM) level of digital products. We construct a model where the equilibrium prices and protection levels are dependent upon the two parameters: public copy protection of digital products and degree of compatibility of DRM in terms of hacking technology. We show that the optimal levels of DRM and prices are determined by different types of demand structure depending on the strategic interaction between the firms. As a result, the effects of an increase in public copy protection and less compatible hacking tech-nology on the optimal levels of DRM, prices, quantity demanded, and profits have direct and indirect channels of which the latter is induced by the change of DRM. It is shown that total effects are dependent upon the demand structure and the stra-tegic nature of DRM. The paper also discusses results of social welfare analysis. JEL Classification: L13, L82, L86, O34. We are grateful to Jay Pil Choi, Johan Stennek, and participants in the IIOC (2007) for construc-tive comments and encouragement. Any remaining errors are solely ours.
... Even, those studies which consider duopoly, do not adequately reflect the reality of the industries. Belleflamme and Picard (2007) and Park and Scotchmer (2005) model duopoly settings focusing only on pricing, rather than addressing both copy protection levels and pricing for digital goods providers. Since copy protection is one of the central issues in piracy, it makes more sense to treat copy protection level as a decision variable, rather than a parameter. ...
... Later research turned to copyright issues and examined how copyright protection affects the level of piracy, pricing, development incentives, and social welfare (e.g., Bae and Choi 2006; Besen and Raskind 1991). Most of this research, however, focuses on monopoly cases, and only a handful of studies address duopoly cases (Belleflamme and Picard 2007; Johnson 1985; Park and Scot chmer 2005). Given the observation that only a small number of large companies dominate the industries with digital products, analysis of duopoly is more realistic than that of monopoly. ...
... ases (Belleflamme and Picard 2007; Johnson 1985; Park and Scot chmer 2005). Given the observation that only a small number of large companies dominate the industries with digital products, analysis of duopoly is more realistic than that of monopoly. Even, those studies which consider duopoly, do not adequately reflect the reality of the industries. Belleflamme and Picard (2007) and Park and Scotchmer (2005) model duopoly settings focusing only on pricing, rather than addressing both copy protection levels and pricing for digital goods providers. Since copy protection is one of the central issues in piracy, it makes more sense to treat copy protection level as a decision variable, rather than a parameter. And, ...
Article
The purpose of this paper is to investigate how different types of strategic interactions between two firms affect their optimal pricing and private copy protection levels of digital products. In our model, the firms do not directly interact with each other in terms of prices, but they become interdependent through private copy protection levels. Our analysis shows that 1) stronger public copy protection leads to lower private copy protection and more piracy when the firms regard their private copy protection levels as "strategic substitutes," but higher private copy protection and less piracy when they treat their private copy protection levels as "strategic complements" and 2) more compatibility between private copy protection systems leads to lower private copy protection and more piracy. We also discuss public policy issues regarding these findings.
... It has recently been shown that prices are very important for deterring consumers from copying and from buying copies from illegal firms who illegally make and sell them, both empirically (Papadopoulos (2003)) and theoretically (Bae and Choi (2006) and Martínez-Sánchez (2007)), 1 and that competition drives prices up and may lead to price dispersion (Belleflamme and Picard (2007)). Price strategies thus become very important in markets for piratable goods. ...
... In this paper we investigate firms' ability to tacitly collude on prices in an infinitely repeated duopoly game of vertical product differentiation. To that end we use the model developed by Belleflamme and Picard (2007). They consider that the copying technology exhibits increasing returns to scale, and they analyze the pricing behavior of a multiproduct monopolist and a duopolist in a model of vertical product differentiation, where there are two information goods which are perfectly (horizontally) differentiated and equally valued by users. ...
... They also show that the multiproduct monopolist has an incentive to set lower prices than the duopolist because it realizes that decreasing the price for one good increases demand for the other good by making copying less attractive. Finally, Belleflamme and Picard (2007) show that a multiproduct monopoly makes for greater welfare than a duopoly in the short run but provides lower incentives to create in the long run. ...
Article
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In this paper we analyze firms' ability to tacitly collude on prices in an infinitely repeated duopoly game of vertical product differentiation. We show that firms collude if and only if their discount factor is high enough, i.e. if they value future profits sufficiently. We also show that a lower cost of copying facilitates collusion but that a higher quality of the copy hinders collusion. Thus, the overall effect of these new characteristics of copies made by consumers is ambiguous.
... Copying technology by consumers is showing increasing returns to scale as analyzed by Belleflamme and Picard [2] 1 . They show that the multiproduct monopolist has a greater incentive to set lower prices than the duopolist because decreasing the price for one good increases demand for the other good by making copying less attractive. ...
... They call this result the Cournot effect. Finally, Belleflamme and Picard [2] show that a multiproduct monopoly provides greater welfare than a duopoly in the short run but provides lower incentives to create new goods in the long run. ...
... Moreover, we show that the existence of the Cournot effect may fail, unlike previous studies. Finally, by analyzing social welfare we show that the results obtained by Belleflamme and Picard [2] are robust when we consider a more general cost function of copying. ...
Article
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In this paper, we analyze the behavior of a multiproduct monopolist, a duopolist and consumers who are able to learn by copying. We show that the DRM systems implemented by the digital industry have adverse consequences, because they hinder the use of original goods and provide consumers with an incentive for copying. Finally, we show that the Cournot effect may fail, unlike previous studies.
... More recent papers by Choi et al. (2010) and Belleflamme and Picard (2007) extend the analysis to a duopoly in which two innovators are competing not only against each other, but also pirates. The analysis in the current paper builds on this model of piracy as this represents well the nature of the IP protection issue facing breeders seeking to reduce illegal reproduction of their seed, or similarly policy options to render illegal such reproduction by farmers. ...
... A final note concerns the potential applicability of the analysis here to the context of digital products subject to copyright protection, such as software or entertainment media, which motivated the models upon which the present paper builds. The analysis of Bae and Choi (2006) and Belleflamme and Picard (2007) considers products that are typically final consumption goods, such as digital music or video. Many of the most widely used software products though, such as operating systems and office applications, are used as much if not more by businesses and may also be considered as intermediate goods. ...
... The treatment of heterogeneity among the purchasers of the innovation is relatively new in the literature, though it has been prominent in models of copyright protection and software or music piracy, as noted in chapter 3 (Belleflamme and Picard, 2007;Yoon, 2002), which are also developed in a vertical product differentiation setting. An appreciation of heterogeneity among farmers also features in chapter 5 and how the empirical studies were conducted in the five countries. ...
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Zaaizaad is de fysieke uitdrukking van de uitvinding van een plantenveredelaar. Plantenvariëteiten vormen een bijzonder type van innovatie, en alle analyses van intellectuele eigendomsrechten (IE)-systemen dienen hier rekening mee te houden. Dit proefschrift concentreert zich op IE, maar veredelaars hebben een aantal andere tactieken teneinde zich een deel van de baten van de teelt van nieuwe variëteiten toe te eigenen, en te voorkomen dat deze in het publieke domein terechtkomen.
... They show that most studies can be divided into two groups: a single-product market approach and a multi-product market approach. Our study takes the multi-product approach and is closely related to Johnson (1985) and Belleflamme and Picard (2007) in that the interdependence between the firms comes from their strategies against the piracy rather than from competition in prices. ...
... A major difference between our study and other duopoly-based studies is that the copyright protection efforts of the firms are endogenous variables in our model. Other studies usually focus on how piracy affects prices and profits (e.g., Belleflamme and Picard, 2007;Park and Scotchmer, 2005), while treating the firm-level copyright protection as exogenous. The price of a digital product is apparently an important determinant of the piracy level. ...
... Similar findings are reported by Belleflamme and Picard (2007). They propose that perfectly independent products may become complements in some price range where the monopoly sets its price at a lower level than a duopoly to internalize the positive externality generated by the socalled ''Cournot effect." ...
Article
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The purpose of this paper is to investigate how different types of strategic interaction affect firms’ optimal levels of digital rights management (DRM). In our game-theoretical duopoly model, the firms do not directly compete with prices, but they become interdependent while coping with digital piracy. Our analysis shows that (1) stricter public copy protection by the government leads to lower DRM levels and more piracy when the firms regard their DRM levels as “strategic substitutes,” but to higher DRM levels and less piracy when the firms perceive their DRM levels as “strategic complements,” and (2) a higher degree of similarity between the DRM systems leads to lower DRM levels and more piracy. We also discuss the policy implications of these findings.
... However, despite years of costly efforts by trade groups such as the RIAA, piracy remains largely untamed: a joint research by the Business Software Alliance and IDC (2006) puts the piracy rate at 35% worldwide for 2004-2006. A number of papers in economics and information systems have touched the piracy issue theoretically (Sundararajan 2004, Chellappa and Shivendu 2005, Park and Scotchmer 2005, Peitza and Waelbroeck 2006, Belleflamme and Picard 2007. Nevertheless, to date none has considered the (often true) possibility that both the legitimate online channel and the piracy channel include many retailers/services, and thus competition can exist both inside and across channels at the same time. ...
... The economics and information systems research communities have approached piracy control (including whether it is necessary) from a number of perspectives. One school of research assumes that pirated goods have lower qualities than their legitimate counterparts, thus firms can use quality differentiation for piracy control (see, for example, Sundararajan 2004, Chellappa and Shivendu 2005, Park and Scotchmer 2005, Belleflamme and Picard 2007. A related second school of research argues that piracy control may not be necessary since the network effects created by piracy goods can increase the demand pool and thus benefit sales of legitimate goods (see, for example, Bomsel andGeffroy 2005, Chellappa andShivendu 2005). ...
... They, however, deal with a rather specific form of piracy like a private file sharing community and study how its presence affects the pricing behavior and profitability of producers of digital products. It is also important to note that digital developers' competition can also occur in a multiproduct framework, where piracy can generate a kind of indirect competition between horizontally differentiated digital products as demonstrated by Belleflamme and Picard (2007). They show how the copying technology displaying increasing returns to scale can create an interdependence between the demands for digital products that would be unrelated otherwise . ...
... Firms may then randomize between several prices, leading to price dispersion. Following the approach of Belleflamme and Picard (2007), Choi, Bae, and Jun (2010) use a Hotelling horizontal differentiation model as well and analyze the situation in which also the interdependence between the firms stems from their strategies against piracy rather than from direct competition on prices. They, like we do, consider the IPR efforts of the Finally, there are by now numerous scholarly articles that deal with the issue of digital piracy and private or public IPR protection in the monopoly set-up (see, for instance, Banerjee, 2003; King and Lampe, 2003; Kúnin, 2004; Takeyama, 2009). ...
Article
We study the economic impacts of the interaction between a regulator's Intellectual Property Rights (IPR) protection policy against software piracy on the one side and the forms of IPR protection that software producers may themselves undertake to protect their intellectual property on the other side. Two developers, each offering a variety of different quality, compete for heterogeneous users who choose among purchasing a legal version, using an illegal copy, and not using a product at all. Using an illegal version violates IPR and is thus punishable when disclosed. If a developer considers the level of piracy as high, he can either introduce a form of physical protection for his product or introduce a protection in the form of restricting support and other services to illegal users. The quality of each developer's product is exogenously given, and the developers compete in prices. We examine the above issues within the framework of Bertrand and Stackelberg competition while the monopoly set-up serves as a point of reference.
... Given that µ (0,1/2) and k > 3/2, we find that p C > p N , which is opposing to the result obtained by Belleflamme and Picard (2007). This is because they assume that copying technology by consumers exhibits increasing returns to scale, which implies goods become complementary. ...
Article
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In this paper we analyze firms' ability to tacitly collude on prices in software markets. We show that network externality hinders collusion. We also show that firms collude if they value future profits sufficiently.
... For studies on digital and software piracy effects on market outcomes see, e.g. Conner and Rumelt (1991), Slive and Bernhardt (1998), Shy and Thisse (1999), Yao (2005), Bae and Choi (2006), Peitz and Waelbroeck (2006), Belleflamme and Picard (2007), Cremer and Pestieau (2009), and Chang and Walter (2015). For issues on copyright laws, protection and enforcement, see, e.g. ...
Article
In the presence of commercial digital piracy, should the government provide costly protection for intellectual property rights (IPR)? Under what conditions will government protection and private protection be substitutes or complements? We show that a product’s original developer has an incentive to bear R&D costs for private protection when the quality of a pirated copy is moderate. We consider that the welfare-maximizing government determines its costly IPR protection and commits a fraction of the pirate’s monetary fines to the developer for compensation while striking a balance in the enforcement budget. In this case, the government will not launch costly IPR enforcement unless the pirated copy’s quality is sufficiently high. Otherwise, government IPR protection is socially undesirable. These results suggest that government protection and private protection are substitutes.
... This framework has been extended to account for competition (cf. Belleflamme and Picard (2007)) and for the intervention of commercial illegal players instead of user communities (Banerjee (2006), Martinez-Sanchez (2010)). ...
Article
In the case of digital piracy should rights be publicly or privately enforced? The emergence of large-scale anti-piracy laws and the existence of non-monitored illegal channels raise important issues for the design of digital anti-piracy policies. In this paper, we study the impact of these two enforcement settings (public vs. private) in the presence of an illegal non-monitored outside option for users. Taking account of market outcomes, we show that in both cases, the optimal strategies of the legal seller and the monitoring authority leads to rejection of the outside option out while accommodating to the presence of illegal monitored channels. Compared to private enforcement, public enforcement generates higher monitoring levels and lower price levels. Public enforcement also generates greater (legal) welfare. However, we identify potential conflict of interests between the legal seller and the social planner when the efficiency of non monitored networks is low. We provide some insights into the role of supply side anti-piracy policies.
... 10 Belleflamme and Picard (2007) contrast the strategic behaviour of a multiproduct monopolist with the behaviour of two Bertrand duopolists under the threat of piracy. They find that piracy may induce the monopolist to decrease prices while inducing the duopolists to increase prices. ...
Article
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 àlaHotelling (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.
... In recent economic literature, models where piracy or violations of copyright occur have been developed in static setups (see, for example, [4][5][6][7]), whereas dynamic approaches are quite rare. To the best of our knowledge, strategic models in the field of industrial organization involving judicial elements and violations of law have received scanty attention, in particular those building on differential game theory in deterministic frameworks. ...
Article
Building on differential game theory involving asymmetric agents, an oligopoly game between two distinct groups of firms is analyzed and solved under open-loop information. One group develops Research & Development to reduce its marginal production costs and behaves fairly, whereas the other one violates intellectual property rights of the rival, using the stolen technology to reduce its own marginal costs. We investigate the effects of law enforcement in this setup, by discussing the appropriate fine to be determined and the profitability of unfair behavior. Finally, we assess how the duration of related trials can affect efficiency of enforcement policy.
... There is, however, another stream of literature that looks at the impact of piracy (copying and sharing of information goods) on information goods pricing (e.g., Belleflamme [2002], Chen and Png [2003], Belleflamme and Picard [2007], Khouja and Smith [2007]). The situations considered by the literature include copied goods of the same quality as the original, as well as copied goods of inferior quality. ...
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With the rapid increase of virtual goods created for virtual world exchanges and the record growth of user-to-user transactions in these in-world economies, an important question is how a creator sets prices for a virtual good so as to maximize her profit from her creation. Virtual goods share similar economic properties (such as substantial production cost and negligible marginal cost) with other types of digital goods. However, one aspect that distinguishes a virtual good is that consumers in a virtual world may want to use multiple copies of the identical good at the same time, and such simultaneous use of multiple copies of the identical good increases a consumer's utility. In this research, we focus on the COPY permission of virtual goods. We develop an economic model to examine under what conditions the COPY permission setting leads to the highest profit for the creator of a virtual good, and what the pricing strategies are in a dynamic setting when such permission choices are present. Theoretical and practical implications of the research are discussed.
... This does not imply, that a decision by a court is given. 7 Recent work by Qian (2008) and Belleflamme and Picard (2007) emphasize the price dispersion effect of piracy entry, potentially enhancing long-run quality performance of genuine producers in the market. 8 See discussion by Bosworth (2006) on differences in quality of genuine and copied goods, probability of perception by consumers and deception success. ...
Article
This paper examines the relationship between a firm's strategic framework and business environment and the probability of becoming the target of "copying", differentiated into (i) unauthorized reproduction of its technological product elements or insignia, and (ii) patent and trademark infringement. Based on bivariate and multivariate analyses of survey data, we show patterns of the links between being (legally or illegally) imitated and IP protection (e.g.; defensive publishing), general strategy (e.g.; selling products abroad or off-shoring R&D activities) and organizational factors (e.g.; firm size). Management implications for successful strategies against the different types of being copied are derived.
... Considering that α 0, and , we have that , that results to be contradictory to the result found by Belleflamme and Picard (2007) as already shown by Martinez-Sanchez (2012). This is because they do not contemplate increasing returns for firms due to consumers' higher willingness to pay given the green network effect. ...
Article
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We analyse the effect of a “green network externality” in a context of consumers’ environmental sensitiveness and competition between firms in both environmental quality and product prices. In particular, we investigate firms ‘aptitude to implicitly collude on prices in a vertically differentiate market. We find that green network effects hamper collusion. We also find that firms collude if they recognize an adequate value in future joint profits.
... This does not imply, that a decision by a court is given. 9 Recent work by Qian (2008) and Belleflamme and Picard (2007) emphasize the price dispersion effect of piracy entry, potentially enhancing long-run quality performance of genuine producers in the market. 10 See discussion by Bosworth (2006) on differences in quality of genuine and copied goods, probability of perception by consumers and deception success. ...
... In a similar vein, Wu and Chen (2008) show that under certain conditions, versioning can be an effective tool to fight piracy in digital information goods and that it can both substitute or complement other instruments that may increase the cost of piracy. In addition, see Sundararajan (2004), Chellappa and Shivendu (2005), Belleflamme and Picard (2007), and Johar et al. (2012) for other examples of related theoretical work. ...
Article
We partner with a major multinational telecommunications provider to analyze the effect of subscription video-on-demand (SVoD) services on digital piracy. For a period of 45 consecutive days, a group of randomly selected households who used BitTorrent in the past were gifted with a bundle of TV channels with movies and TV shows that could be streamed as in SVoD. We find that, on average, households that received the gift increased overall TV consumption by 4.6% and reduced Internet downloads and uploads by 4.2% and 4.5%, respectively. However, and also on average, treated households did not change their likelihood of using BitTorrent during the experiment. Our findings are heterogeneous across households and are mediated by the fit between the preferences of households in our sample for movies and the content available as part of the gifted channels. Households with preferences aligned with the gifted content reduced their probability of using BitTorrent during the experiment by 18% and decreased their amount of upload traffic by 45%. We also show using simulation that the size of the SVoD catalog and licensing window restrictions limit significantly the ability of content providers to match SVoD offerings to the preferences of BitTorrent users. Finally, we estimate that households in our sample are willing to pay at most $3.25 USD per month to access a SVoD catalog as large as Netflix's in the United States. Together, our results show that, as a stand-alone strategy, using legal SVoD to curtail piracy will require, at the minimum, offering content much earlier and at much lower prices than those currently offered in the marketplace, changes that are likely to reduce industry revenue and that may damage overall incentives to produce new content while, at the same time, curbing only a small share of piracy.
... On copying of digital products, almost all papers in the literature, with exceptions like Shy and Thisse (1999) and Belleflamme and Picard (2007), concentrate on a single-firm setting. The implications of enforcement/monitoring and piracy on welfare in a two firm setting under competition, and how these firms may strategically determine prices and set monitoring levels jointly under presence of piracy, have not been analyzed in detail. ...
Article
Based on a duopolistic set-up where firms produce software products with respective support packs, we analyze firms' pricing and predetermined monitoring decisions, as well as the impacts of these factors on welfare. In the presence of end-user piracy, users are classified as support-dependent and support-independent. First, a theoretical model is derived, but, due to its complexity, a numerical example is employed to derive the results. We observe that firms that are in competition face a menu of monitoring and pricing combinations. Our results indicate that (i) firms may use monitoring and pricing as strategic complements, rather than substitutes, (ii) profits are not necessarily an increasing function of both monitoring rates and prices, and welfare improvement from the lowest set of monitoring and pricing levels is possible, (iii) firms may prefer improvement in software rather than support packs, targeting especially the support-independent users.
... 78 Moreover, there is quantitative evidence for other industries that piracy entry increases incumbents' investment in quality and in longer term due to the increases in (unauthorized) competition. In turn, this might compensate for some of the welfare decreases and revenue displacement effects from piracy right holders experience in short term ( [5], [29]). ...
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Platforms often compete over non-price strategies such as the exclusive distribution of products. But these strategies are not always welfare-enhancing. Using rich data on audiovisuals distributed on platforms in Brazil, we find that non-exclusive distribution and availability of titles across platforms is more effective in deterring online piracy than in the singlehoming case. Moreover, in certain markets (TVOD), it induces higher average investment in the production of new titles upstream. We discuss options of copyright and antitrust policies in the light of these findings.
... copying. Related to Johnson (1985), the idea that copying generates a form of indirect competition between horizontally differentiated digital products has been studied by Belleflamme and Picard (2007). In a multi-product framework, they show how increasing returns to scale in the copying technology create an interdependence between the demands for digital products, which would be independent otherwise. ...
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This article reviews recent theoretical contributions on digital piracy. It starts by elaborating on the reasons for intellectual property protection, by reporting a few facts about copyright protection, and by examining reasons to become a digital pirate. Next, it provides an exploration of the consequences of digital piracy, using a base model and several extensions (with consumer sampling, network effects, and indirect appropriation). A closer look at market-structure implications of end-user piracy is then taken. After a brief review of commercial piracy, additional legal and private responses to end-user piracy are considered. Finally, a quick look at emerging new business models is taken.
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This article addresses possible structural alternatives for the dissemination of the results of intellectual activity (RIA), which reflect setting of optimal price and level of technical protection. The paper argues that digital piracy is not always a negative factor for the author or copyright owner but may be a signal indicating an inefficiently of RIA distributing method. The developed model demonstrates the choice of RIA distribution strategy depending on various factors: author's popularity, the difference in quality between the original RIA and pirated copy, legal protection level. The findings regarding the possibilities of combining legal and technical protection, consumer behavior and the positive effects of digital piracy will help the regulator to apply more effective measures. The article is written on the basis of the RANEPA state assignment research program.
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This thesis consists of five essays on the management and economics of patents. I empirically analyze economic phenomena which influence the corporate use of patents. The thesis is structured into two parts. In the first part, I analyze the role of strategic patenting motives, the role of incentives for firms to have their patented technology included in industry standards, and determinants of cross-licensing. I show a number of interrelations between these factors and the patenting and filing behavior of firms as well as with the resulting patents. The second part of the thesis addresses the risk of unauthorized imitation of proprietary technology or trademarks (“product piracy”) as well as with the resulting reaction in the protection strategies of firms. I show that firm strategic aspects such as research and development (R&D) activities abroad or the general R&D activity of the firm correlate with the risk of product piracy. I also show evidence that firms react to cases of unauthorized imitation with a stronger use of formal protection strategies (such as patents) as opposed to informal protection methods such as trade secrets or a faster time to market. The empirical analyses are based on a number of different samples at the firm and patent level. I use several microeconometric techniques such as regression, survival and matching methods. The work discusses the implications of the results for innovation incentives, technology (especially patent) policy and for the management of intellectual property protection.
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The paper addresses a trademark infringer who seeks to capitalize on the reputation of a trademark owner, sells an identical product under a trademark which is confusingly similar to that of the owner, charges the same price and competes with him in the same market. We show that the welfare-maximizing monitoring intensity is zero, hence the government is not likely to engage in monitoring infringement. Recognizing this, the trademark owner may consider monitoring the market himself, discovering, however, that this is worth his while only if the penalty for infringement, which he fully collects, is sufficiently high. Given the entry condition, an increase in the penalty may either raise or lower the optimal monitoring intensity. In the former case it will counter-intuitively increase the infringer's expected profit, apparently because a higher penalty will also lead to a raise in price. While monitoring enables the trademark owner to maintain a positive profit level, it reduces social welfare. The government may intervene to eliminate the private incentive for monitoring through taxing the collected penalty.
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In this paper, we address the issue of illegal copying or counterfeiting of the original product and Intellectual Property Right (IPR) protections. The original product developer makes costly investment to deter piracy in a given regime of IPR protection. In the presence of a commercial pirate, we find that it is profitable for the original producer to accommodate the pirate when there is weak IPR protection, and deter when the IPR protection is strong. However, in the comparative statics analysis, we find that there is a non-monotonic relationship between the optimal level of deterrence (chosen by the original producer) and the degree of IPR protection in the economy. The relationship between the rate of piracy and IPR protection is found to be monotonically decreasing whereas the relationship between the rate of piracy and the quality of the pirated product turns out to be non-monotonic.  We are grateful to the participants of PET2008 and the 8 th Forum for China Young Economists (2008) for providing helpful comments. The first author (Yuanzhu Lu) also thanks State Education Ministry of China for financial support (The Project Sponsored by the Scientific Research Foundation for the Returned Overseas Chinese Scholars, State Education Ministry). All errors remain ours. Address for correspondence.
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In this paper, we study when the original product developer makes costly investment to deter a commercial pirate in a given regime of intellectual property rights (IPR) protection. We find that when the consumers’ tastes are sufficiently diverse and the IPR protection is weak, it is profitable for the original producer to accommodate the pirate. In all other cases, it is profitable to deter. In the comparative statics analysis, we find a non-monotonic relationship between the optimal level of deterrence and the degree of IPR protection in the economy. We also find interesting relationships between the rate of piracy and other parameters like the strength of IPR protection, consumers’ tastes, and quality of the pirated product. We find that from the commercial pirate's point of view, the most profitable way to survive in the market is to produce a pirated product of moderate quality.
This article examines the scholarly literature pertaining to music, film and software piracy around the world, with special attention to data sources, research scope and general findings. The article finds that the conspicuous absence of methodologies utilizing critical theory in this broad literature has constricted the world view of piracy, resulting in monolithic explanations of the causes and correlates of piracy. It further identifies systematic biases relating to the unjustified use of data published by the industry watchdog Business Software Alliance (BSA).
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The paper explores one of the new business models of the music market proposed by Varian (2005): the importance of the promotional effect of web-based diffusion. An indirect form of such investment consists in non-opposition by artists against the circulation of their music files online, or, likewise, their choice of permitting free downloads of their music albums. The profits lost from legal sales - online or on traditional supports - may be off-set by promotional advantages deriving from greater diffusion, with an increase in the artist's market share. The model assumes the existence of a strong network effect and an exchange of information, opinions and contents among web users. The model's results are determined by the initial conditions, i.e. by an artist's market share at an initial instant of time: or in other words, by his/her popularity. It is shown that emerging artists should make maximum investment in promotion, so that the diffusion of their work can be driven by the network effect and they can emerge from anonymity. Instead, for well-established artists, whose market shares are already large, the optimal strategy is to make the least promotional effort, given that the spontaneous diffusion of their work is already high.
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Digital products can be copied at almost no cost and are subject to non-commercial copying by final consumers. Because the copy of a copy typically does not deteriorate in quality, copies can become available on a large scale basis – this can be illustrated by the surge of file-sharing networks. In this paper we provide a critical overview of the theoretical literature that addresses the economic consequences of end-user copying. We analyze basic models of piracy, models with indirect appropriation, models with network effects, and models with asymmetric information. We discuss the applicability of the different modeling strategies to a number of industries such as software, video and computer games, music, and movies.
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This paper develops a simple model of software piracy to analyze the short-run effects of piracy on software usage and the long-run effects on development incentives. We consider two types of costs associated with piracy: the reproduction cost that is constant across users and the degradation cost that is proportional to consumers’ valuation of the original product. We show that the effects of piracy depend crucially on the nature of piracy costs. Policy implications concerning copyright protection are also discussed.
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This paper investigates the recently practiced method of taxing hardware and transferring the proceeds to software makers, or artists in general. We characterize the conditions under which the policy of compensating copyright owners for infringements on their intellectual property using hardware taxation is inefficient.
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Previous authors who have considered partially nonexcludable goods have claimed that an increase in copyright protection will have the following two effects on social welfare. First, it will decrease the social welfare loss due to underproduction. Second, it will increase the social welfare loss due to underutilization. In this paper we investigate these claims in a formal setting by analyzing a model in which consumers vary only in terms of their costs of obtaining a reproduction. Our analysis provides partial support to the first claim of these previous authors while giving little or no support to the second claim.
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We consider a duopoly industry with two separate firms each selling an indivisible product. The joint consumption of these goods has a specific value for the consumers which exceeds the mere addition of utilities when products are consumed in isolation: the higher this excess, the larger the complementarity between the goods. We analyse price equilibria in this market as related to the degree of complementarity existing between the two products.
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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. Copyright (c) 1999 Massachusetts Institute of Technology.
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We examine the equilibrium interaction between a market for price information (controlled by a gatekeeper) and the homogenous product market it serves. The gatekeeper charges fees to firms that advertise prices on its Internet site and to consumers who access the list of advertised prices. Gatekeeper profits are maximized in an equilibrium where (a) the product market exhibits price dispersion; (b) access fees are sufficiently low that all consumers subscribe; (c) advertising fees exceed socially optimal levels, thus inducing partial firm participation; and (d) advertised prices are below unadvertised prices. Introducing the market for information has ambiguous social welfare effects.
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During the 1980s the share of prescriptions sold by retail pharmacies that was accounted for by generic products roughly doubled. The price response to generic entry of brand-name products has been a source of controversy. In this paper we estimate models of price responses to generic entry in the market for brand-name and generic drugs. We study a sample of 32 drugs that lost patent protection during the early to mid-1980s. Our results provide evidence that brand-name prices increase after generic entry and are accompanied by large decreases in the price of generic drugs. Copyright (c) 1997 Massachusetts Institute of Technology.
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We characterize the Nash equilibrium in the Hotelling model in the presence of an import quota. The optimal quota is identified and shown to be invariant to the mode of competition. We also prove that in the presence of a quota maximal differentiation is not achieved at equilibrium.
PrivateCopying,Appropriability,andOptimalCopying RoyaltiesAn Introduction to the Law and Economics of Intellectual Property
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Copyright and Economic Theory. Friends or Foes? Cheltenham
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Watt, R., 2000, Copyright and Economic Theory. Friends or Foes? Cheltenham, U.K. and Northampton, MA: Edward Elgar.
Internet Shopping Agents: Virtual Colocation and Compe-tition
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