Digital piracy: an update
Paul Belleflamme and Martin Peitz
Center for Operations Research
Voie du Roman Pays, 34
CORE DISCUSSION PAPER
Digital piracy: an update*
Paul BELLEFLAMME 1 and Martin PEITZ 2
This note summarizes and updates our previous survey of the economics of digital piracy (Belleflamme
and Peitz, 2012).
Keywords: information good, piracy, copyright, IP protection, internet, peer-to-peer, software, music.
JEL classification: L11, L82, L86.
1 Université catholique de Louvain, CORE and Louvain School of Management, B-1348 Louvain-la-Neuve,
Belgium. E-mail: firstname.lastname@example.org
2 Department of Economics, University of Mannheim, D-68131 Mannheim, Germany; CEPR, CESifo, ENCORE
and ZEW. E-mail: email@example.com
* To be published in Backhaus, J. 'ed.), Encyclopedia of Law and Economics. Springer (in print). This version:
The objective of this note is to provide a comprehensive and up-to-date
overview of digital piracy. Although we put the emphasis on the economic
analysis, we also brieﬂy present the legal context and its recent evolution. As
digital piracy consists in infringing intellectual property laws, it is important
to start by understanding the rationale of such laws. That allows us to
deﬁne more precisely what is meant by digital piracy. We can then move
to the economic analysis of piracy. We start with the basic analysis, which
explains why piracy is likely to decrease the proﬁts of the producers of
digital products; we also examine how the producers have reacted to digital
piracy when it started to grow. We review next more recent contributions
that point at possible channels through which piracy could improve the
proﬁtability of digital products. These channels have inspired new business
models for the distribution of digital products, which we describe in the last
part of the essay. Throughout the essay, we report the results of some of
the most recent empirical studies, so as to quantify the impacts of digital
The IP protection of information products
Information products (such as music, movies, books, and software) are often
characterized as being hardly excludable, in the sense that their creators face
a hard time excluding other persons, especially non-payers, from consum-
ing these products. This feature may undermine the incentives to create,
because of the diﬃculty in appropriating the revenues of the creation. The
production of information products may then be insuﬃcient compared to
what society would deem as optimal. One solution to this so-called “under-
production” problem is to make intellectual creations excludable by legal
means. This is the objective pursued by intellectual property (IP) laws,
which most countries have adopted. IP refers to the legal rights that result
from intellectual activity in the industrial, scientiﬁc, literary and artistic
ﬁelds. IP laws generally distinguish among four separate IP regimes, which
are targeted at diﬀerent subject matters: information products (and more
generally literary, musical, choreographic, dramatic and artistic works) are
protected by copyrights; the three other regimes (patents, trade secrets and
trademarks) aim at protecting industrial property (such as inventions, pro-
cesses, machines, brand names, industrial designs).
It is important to note, from an economic perspective, that IP laws al-
leviate the “underproduction” problem at the cost of exacerbating an “un-
derutilization” problem. To understand this second problem in the context
of information products, we need to refer to another characteristic of infor-
mation products, namely their nonrivalness, which refers to the property
that their consumption by one person does not prevent their consumption
by another person (for instance, the fact that some person listens to the
performance of an artist does not reduce the possibility for anyone else in
the audience to listen to the same performance). A consequence of this non-
rivalness is that the marginal cost of production of information products is
zero (that is, taking the artist’s viewpoint in the previous example, once the
show has started, it costs nothing to have one extra spectator viewing it).
From the point of view of static eﬃciency, the price of information goods
should therefore be equal to zero. However, because IP laws endow them
with some market power, the creators of information products are able to
set a positive price, which reduces social welfare by preventing those con-
sumers with a low, but positive, valuation of the information products from
In other words, IP laws aim at striking the balance between providing
incentives to create and innovate, while promoting the diﬀusion and use of
the results of creation and innovation. To do so, IP rights are granted only
for a limited period of time and for a limited scope. In particular, copyright
protection usually lasts for a number of years (currently, 70 in both the
European Union and the United States) after the creator’s death; in terms
of scope, copyrights protect only the expression but not the underlying ideas.
Deﬁning digital piracy
IP laws are eﬀective only if they are properly enforced and respected. Yet, as
far as information products are concerned, one observes a large-scale viola-
tion of the laws protecting them, a phenomenon known as “piracy”. What
is striking is that the illegal reproduction and distribution of copyrighted
works is not only the act of criminal organizations (so-called “commercial
piracy”) but also the act of the consumers themselves (so-called “end-user
1We do not review here factors that inﬂuence the piracy decision; one can indeed wonder
what motivates such large-scale violation of IP laws by individuals who are normally law-
Commercial piracy does not need much analysis, as the motivation is
easily understood: criminal organizations are simply attracted by the high
proﬁt margins that the large-scale reproduction and distribution of copy-
righted products generates. On the other hand, end-user piracy raises a
number of issues that the fast penetration of the Internet and the digitiza-
tion of information products have made much more pressing. Digital tech-
nologies have indeed drastically reduced the cost of making and distributing
illegal copies, while increasing their quality; thereby, they have deeply mod-
iﬁed the interaction between end users, copyright holders, and technology
companies. End-user piracy in the digital age, or for short digital piracy, is
thus a major phenomenon that requires a thorough analysis.
The basic economics analysis: digital piracy decreases proﬁts
The main consequence of digital piracy is that it seriously limits copyright
owners in their ability to control how information products get to consumers.
As a result, the availability of digital copies is likely to reduce the copyright
owner’s proﬁts. This is the prediction that can be drawn from the basic
theoretical modeling of piracy (see, for instance, Novos and Waldman, 1984,
Johnson, 1985, and the references in Belleﬂamme and Peitz, 2012). These
models simplify the analysis by focusing on the market for a digital product
supplied by a single producer. One can justify this assumption by arguing
that digital products within a given category are highly diﬀerentiated in
the eyes of the consumers; the demand for any product is therefore hardly
aﬀected by the prices of other products. Even though the copyright owner
acts as a monopoly, she faces nevertheless the competition exerted by the
availability of (illegal) digital copies. Copies are seen as imperfect substi-
tutes for the original digital product, insofar as their quality is generally
lower than the quality of original products. In particular, the quality of
copies primarily depends on technological and legal factors, which can be
aﬀected by public authorities (through the deﬁnition and the enforcement
of IP protection) and/or by the copyright owner herself (through technical
protective measures). In this setting, it is possible to analyze the copyright
owner’s decisions about the pricing and the technical protection of original
products, as well as public policy regarding IP laws.
abiding citizens; for a review of the literature on this topic, see Novos and Waldman
The main results of these analyses can be summarized as follows. First,
because consumers with a low cost of copying or with a low willingness to
pay for quality prefer copies to original products, the copyright owner is
forced to charge a lower price (than in a world where digital piracy would
not exist). That clearly decreases the copyright owner’s proﬁts but increases
the surplus of the consumers of original products; moreover, a number of
consumers who were not willing to purchase the original product at the
monopoly price get now some utility from the pirated copies. As the increase
in consumer surplus outweighs the proﬁt reduction, digital piracy results in
an improvement of welfare from a static eﬃciency point of view (like any
erosion of market power does). However, the lower proﬁts may reduce the
incentives of copyright owners to improve the quality of existing products
or to introduce new products on the market; this is detrimental to welfare
from a dynamic perspective. Moreover, total welfare may decrease because
of a number of avoidable costs that digital piracy entails (e.g., the costs
for producers to implement technical protective measures, or the costs for
public authorities to enforce copyrights).
Looking at the proﬁts of copyright owners, it is an undisputed fact that
they started to decrease when end-user piracy started to grow (i.e., around
1999 with the launch of Napster, a peer-to-peer ﬁle-sharing service). This
was particularly acute in the music industry where physical music sales
(that is to say, CDs) dropped signiﬁcantly. Numerous empirical studies
(for a survey, see Waldfogel, 2012a) have tried to estimate the extent to
which this decrease in sales could be attributed to digital piracy. These
studies converged on the conclusion, now widely accepted, that digital piracy
has ”displaced” physical sales (i.e., legal purchases were substituted for,
mainly, illegal downloads). However, it is also established that the estimated
”displacement rate” is slightly above zero and nowhere near unity, reﬂecting
the observation that the vast majority of goods that were illegally consumed
would not have been purchased in the absence of piracy (contrary to what
the recording industry would have liked the general public to believe by
counting any download as a lost sale).
Very little empirical work has been devoted to the long-term eﬀects of
piracy (i.e., to dynamic eﬃciency considerations). One notable exception is
Waldfogel (2012b), who tries to estimate the extent to which digital piracy
has aﬀected the incentives to bring forth a steady stream of valuable new
products. To address this issue, he uses three diﬀerent methods to assess
the quality of new recorded music since Napster. The three resulting indices
of music quality show no evidence of a reduction in the quality of music
released since 1999; two indices even suggest an increase. One explanation
could be that the digital technologies that have made piracy easier have also
reduced the costs of bringing creative works to market, and that the latter
eﬀect is at least as important as the former.
Reactions of copyright owners
In the face of digital piracy and of the reduction of sales, the ﬁrst reaction of
copyright owners was to try and prevent the existing business models from
crashing down. As these models were relying on controlled distribution
and broadcast channels, the main strategies consisted (i) in pursuing more
heavily copyright infringers, (ii) in using digital technologies as protective
measures, and (iii) in lobbying for more restrictive IP laws.
The music industry started the ﬁght against illegal downloading. In
2001, the Recording Industry Association of America (RIAA) obtained the
closure of Napster but the victory proved short-lived as a number of other
ﬁle-sharing systems (such as Kazaa, Limewire, and Morpheus) quickly re-
placed Naspter. The industry started then a campaign of litigation against
individual P2P ﬁle sharers: between 2003 and 2008, legal proceedings were
opened against about 35,000 people. The software and the movie industries
also engaged in similar legal battles.
A far as technical measures are concerned, a common tactic was to pro-
tect digital products through so-called digital rights management (DRM)
systems, which inhibit uses of digital content not desired or intended by the
content provider. DRM systems were meant to ﬁght digital piracy but also,
more generally, to manage how digital products can be used. Well-known
examples of DRM systems are the Content Scrambling System (CSS) em-
ployed on ﬁlm DVDs since 1996, so-called ‘copy-proof’ CDs introduced by
Bertelsman in 2002 (which could not be played on all CD players and were
later abandoned), and the FairPlay system used by Apple on its iTunes Mu-
sic Store. Such systems were gradually abandoned in the music industry
(but are still used in other industries, such as in the case of ebooks).
Finally, lobbying eﬀorts were met with success as stronger copyright laws
were passed in a number of countries. In the U.S., in 1998, the Copyright
Term Extension Act extended the duration of existing copyrights by 20
years, while the Digital Millenium Copyright Act reinforced copyright pro-
tection by making it a crime to circumvent the technological measures that
control access to copyrighted work. In Europe, a number of EU directives
led EU member states to harmonize their national copyright laws in the ﬁrst
half of the 1990s; also, the European Union Copyright Directive (EUCD)
of 2001 required member states to enact provisions preventing the circum-
vention of technical protection measures. In the late 2000s, some countries
(led by France and the UK) passed so-called “three-strikes anti-piracy laws”,
which authorize the suspension of Internet access to pirates who ignored two
warnings to quit. Finally, actions were also directly taken against platforms
that were hosting and sharing illegal content (the most famous cases being
the shutdowns of Napster in 2001, of Megaupload in 2012 and of the Pirate
Bay in 2013).
In sum, the ﬁrst reaction of copyright owners in the face of digital piracy
was to enforce and reinforce both the legal and technical excludability of
their products. However, these measures turned out to be of little eﬀective-
ness and sometimes even counterproductive. On the one hand, technical
measures were not only quickly circumvented but they also irritated legiti-
mate consumers, thereby decreasing their willingness to pay for copyrighted
products. Zhang (2013) gives an indirect proof by showing that the deci-
sion by various labels to remove DRM from their entire catalogue of music
increased digital music sales by 10%. To establish this point, she compares
sales of similar albums with and without DRM before and after DRM re-
moval; her sample includes a large selection of hits and niche albums, from
all four major record labels and from multiple genres.
On the other hand, a number of empirical studies have tried to assess
the eﬀectiveness of anti-piracy interventions by governments on the sales
of digital products. The results obtained so far are rather mixed. For in-
stance, two papers examine the impacts of French “three-strikes anti-piracy
law” (known as HADOPI law) introduced in 2009 and reach opposite con-
clusions: Danaher et al. (2014) ﬁnd that the law caused a 20-25% increase
in music sales in France, whereas Arnold et al. (2014) conclude that the
law was ineﬀective not only in deterring individuals from engaging in digital
piracy, but also in reducing the intensity of illegal activity of those who did
engage in piracy. Similarly, diﬀerent approaches to estimate the impacts
of the shutdown of Megaupload in 2012 lead to contrasting conclusions.
Peukert et al. (2013) compare box oﬃce revenues before and after the shut-
down for two sets of movies with matching characteristics but presenting
one main diﬀerence: the ﬁrst set could be accessed illegally through Megau-
pload, while the second set could not. Using a quasi diﬀerence-in-diﬀerences
approach, they establish that the shutdown of Megaupload did not have any
positive impact on box oﬃce revenues across all movies in the sample. In
contrast, Danaher and Smith (2013) exploit the fact that there exists cul-
tural variation across countries in the degree to which Megaupload was used
as a channel for piracy. They show that digital movie revenues for two stu-
dios were 6.5-8.5% higher over the 18 weeks following the shutdown (across
12 countries) than they would have been if Megaupload had continued to
Even if further empirical research is called for to reﬁne the analysis of
the eﬀectiveness of anti-piracy measures, some of the existing results suggest
that digital piracy may also have some positive impacts on the copyright
owners’ proﬁts, which may balance the negative ‘business-stealing’ eﬀect.
We therefore turn to a second set of economic models that present piracy
under a more favorable angle.
Further developments: digital piracy may increase proﬁts
A number of theoretical studies (see Peitz and Waelbroeck, 2006, and the
references in Belleﬂamme and Peitz, 2012) have demonstrated the positive
eﬀects that piracy may have on the proﬁts of copyright owners. Three
mechanisms have been identiﬁed. First, illegal copies of a digital product can
play a sampling role by attracting consumers and driving them to purchase
a legitimate copy later. This argument is based on the observation that
digital products are complex ‘experience goods’; that is, consumers do not
know the exact value that they attach to particular digital products before
consuming them. Buying a legitimate copy may thus appear as risky, which
inevitably reduces demand. However, if an illegal copy can be accessed free
of charge, consumers may learn their valuation of the product and if the
latter is large, they may want to purchase the legitimate product (which is
often, as argued above, of a higher perceived quality).
The empirical results of Zhang (2013) are consistent with this theory. As
we noted above, her analysis shows that the removal of DRM had a positive
impact on digital music sales; yet, this impact was much more pronounced
for niche than for hit albums, which suggests that more ﬂexible sharing
increased sales because it lowered search costs (which are arguably larger
for lower-selling than for top-selling albums).
The second mechanism originates in the fact that many digital products
generate network eﬀects; that is, the attraction of the product increases with
the number of consumers of that product. This is so with software (the wider
is the community of users, the easier it is to exchange ﬁles, and the larger
is the supply of complementary products) or with cultural products (whose
popularity increases with word-of-mouth). As it is the cumulated number
of consumed copies that matter and not whether these copies are legitimate
or not, digital piracy contributes to increase the willingness to pay for legit-
imate copies. An anecdotal evidence of the importance of this mechanism
can be found in the reaction of one of the directors of the series ”Game of
Thrones” (produced by the American premium cable network HB0) when
interviewed about the huge illegal downloading of the ﬁrst episode of the
third season (estimated to over one million times in the space of 24 hours);
he basically stated that the series beneﬁts from piracy because it feeds the
”cultural buzz” that allows this kind of program to ”survive”.2
Finally, the third mechanism, called indirect appropriation, resembles
the second by invoking the fact that piracy can increase the demand for
goods that are complementary to the pirated content; the producer is then
able to capture indirectly the value that consumers attach to the pirated
good. This goes, for example, for increasing ticket sales for the concert of an
artist, whose popularity may be partly due to a large base of fans consuming
pirated copies of this artist’s songs. Mortimer et al. (2012) provide some
empirical evidence along these lines; combining detailed album sales data
with concert data for a sample of 1806 artists on the period 1999 to 2004,
they ﬁnd that digital piracy reduced sales but increased live performance
revenues for small artists (the impact for large, well-known artists being
_2765488.html?utm\_hp\_ref=entertainment\&ir=Entertainment (last visited, Jan-
The presence of these potential positive impacts of piracy and the inabil-
ity to preserve the existing business models drove the content industries to
experiment with new solutions. Because it had been the ﬁrst to be hit by
digital piracy, the music industry also took the lead in terms of innova-
tive business models. The ﬁrst answer to falling CD sales was to move the
distribution of music online. At the forefront was the iTunes Music Store
operated by Apple, which opened in 2003. These legal online channels for
digital music allowed consumers not only to ﬁnd and download music as
easily as via illegal channels, but also to start buying individual tracks in-
stead of being forced to buy albums. Koh, Murthi and Raghunathan (2013)
suggest that the latter possibility induced a new way of consuming music,
which contributed to weaken the negative eﬀect of online music piracy on
physical music sales; according to their empirical assessment, it is the legal
sales of online music and not digital piracy that displaced physical music
sales after 2003.
In the same vein, Aguiar and Martens (2013) conclude that the online
legal sales of digital music (through online stores such as iTunes or via
streaming services such as Spotify) do not seem to be displaced by illegal
downloading; the opposite may even occur. To establish this result, they
analyze the behavior of digital music consumers on the Internet. They use
direct observations of the online behavior of more than 16,000 Europeans.
The main result of their analysis is that illegal downloading has no eﬀect on
legal consumption. At best, this eﬀect is positive: a 10% increase in clicks
on illegal download websites leads to an increase of 0.2% in clicks on legal
purchase websites. Piracy does not induce any displacement of the legal
music purchase in digital format; it might even slightly boost sales.3
New business models in the music industry also oﬀer market solutions
to increase revenues from the segment of consumers with a low willingness
to pay for music and with, therefore, a high disposition to digital piracy. As
3People in the sample have willingly accepted to be observed. This introduces two
potential biases: on the one hand, it is quite likely that the ”heavy downloaders” have
refused to be part of the sample; on the other hand, individuals in the sample may have
changed their behavior knowing that they were observed. We must also keep in mind that
in the relevant time period, while increasing, online music sales accounted for only a small
fraction of the overall revenues of the music industry and that physical sales have been
shown to suﬀer from piracy (5% in 2010 and 8% in 2011 according to IFPI).
Waelbroeck (2013) describes it, the streaming services (such as Spotify or
Deezer) are based on a ‘freemium’ model, which combines free and premium
(i.e., paying) services. The objective is to attract users with the free oﬀering
and, later, ‘convert’ them to paying subscribers. This objective can be
reached through diﬀerent ways: the premium oﬀering can include additional
‘mobility’ (e.g., the possibility to access playlists on various devices, such as
a computer, a tablet or a smartphone), better sound quality, a wider library
of titles, or the removal of ads.
Markets for information products are undergoing major changes due
to technological innovations, which triggered digital piracy and, partly as
a response, new business models. As exempliﬁed above, in this changing
landscape, some research suggests that consumer behavior exhibits several
interesting features. Whether these features are stable over time and space
is an interesting area for future research. Such an understanding is nec-
essary to evaluate the impact of digital piracy on markets for information
products and to develop successful new business models. It is also necessary
to propose appropriate public policy responses.
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diversity. Princeton University Press.
I. THOMAS, D. VANNESTE and X. QUERRIAU (2011), Atlas de Belgique – Tome 4 Habitat. Academia
W. GAERTNER and E. SCHOKKAERT (2012), Empirical social choice. Cambridge University Press.
L. BAUWENS, Ch. HAFNER and S. LAURENT (2012), Handbook of volatility models and their
J-C. PRAGER and J. THISSE (2012), Economic geography and the unequal development of regions.
M. FLEURBAEY and F. MANIQUET (2012), Equality of opportunity: the economics of responsibility.
J. HINDRIKS (2012), Gestion publique. De Boeck.
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R. AMIR (2002), Supermodularity and complementarity in economics.
R. WEISMANTEL (2006), Lectures on mixed nonlinear programming.
A. SHAPIRO (2010), Stochastic programming: modeling and theory.