Wednesday, September 26, 2012
Posted by D. Daniel Sokol
Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics) and Sougata Poddar (Department of Economics, Auckland University of Technology) ask Does Reliable Pirated Product Lead to More Piracy?
ABSTRACT: Conventional wisdom would suggest if a pirated product, which is cheaper than the original product, becomes more reliable then the relative demand of the pirated product or the rate of piracy will increase when consumers have different willingness to pay. However, is this always true? We address this question in a framework where the original product developer makes costly investment to deter pirate(s) in a given regime of IPR protection. We show that the relationship between the rate of piracy and the reliability of the pirated product depends on the nature of the pirate as well as on the nature of the market competition if the pirate is commercial. Under commercial piracy, when the original firm and the pirate compete in quantities, the conventional wisdom holds i.e. the more reliable the pirated product, the higher is the rate of piracy. However, the relationship is non-monotonic, hence the wisdom does not hold when they compete in prices or the pirates are the end-users.