Access Pricing to An Operating System Platform when Piracy Matters

Abstract

This paper examines the impact of piracy on access pricing strategy of an operating system platform. We study the behavior of users and developers due to an increase in software protection when positive network externalities matter. We show that when piracy cost increases, access demands to the platform vary in the same direction and the magnitude of this variation depends on both the marginal network benefit that a developer derives and a certain threshold of piracy cost. Taking into account the behavior of these two sides when piracy matters, the monopoly platform changes its pricing strategy. We show that, it tends to reduce or to increase access fees. Finally, we show that under certain conditions, the divide-and-conquer pricing strategy can be reversed.

Keywords

Platform / software developers / piracy / two-sided market / single-homing

References

[1] Armstrong M. Competition in two sided-markets. Rand Journal of Economics, 2006, 37: 668-691.

[2] August T, Tunca T I. Let the pirates patch? An economic analysis of network software security patch restrictions. Information Systems Research, 2008, 19(1): 48-70.

[3] Bekir I, Harbi S, Grolleau G. L'imitation etlac ontrefaçon peuvent-ellesêtre bénéfiques aux firmes originales?. Revue Internationale de Droit Economique, 2009 51-65.

[4] Bekir I, Harbi S, Grolleau G. Le piratage peutil être profitable à lafirme piratée?. Revue Economique, 2010, 61: 793-805.

[5] Bekir I, Harbi S, Grolleau G. The strategy of raising counterfeiters' costs in luxury markets. Revue Internationale de Droit Economique, 2012, 33: 645-661.

[6] Belleflamme P. Pricing information goods in the presence of copying. The Economic of Copyright: Developments in Research and Analysis, 2002 26-54.

[7] Caillaud B, Jullien. Chicken and eggs: Competition among intermediation service providers. Rand Journal of Economics., 2003, 34: 309-328.

[8] Conner K, Rumelt R. Software piracy: An analysis of protection strategies. Management Science, 1991, 37: 125-139.

[9] Darmon E, Rufini A, Torre D. Back to software “profitable piracy”: The role of delayed adoption and information diffusion. Economic Bulletin, 2009, 29(2): 543-553.

[10] Evans S D. The antitrust economics of two-sided markets. Yale Journal on Regulation, 2002, 20: 325-381.

[11] Hurt R, Schuchman R. The economic rationale for copyright. American Economic Review, 1966, 56: 421-432.

[12] Ishihara M, Muller E. Software piracy and outsourcing in two-sided markets, 2018.

[13] King S P, Lampe R. Network externalities, price discrimination and profitable piracy. Information Economics and Policy, 2002, 15: 271-290.

[14] Lahiri A, Dey D. Effects of Piracy on Quality of Information Goods. Management Science, 2013, 59(1): 245-264.

[15] Peitz M. Astrategic approach tosoftware protection: Comment. Journal of Economics and Management Strategy, 2004, 13: 371-374.

[16] Peitz, Waelbroeck P. Piracy of digital products: A critical review of the theoretical literature. Information Economics and Policy, 2006, 18: 449-476.

[17] Pethig R. Copyright and copying costs: Anew price-theoretic approach. Journal of Institutional and Theoretical Economics, 1988, 144: 462-495.

[18] Rasch A, Wenzel T. Piracy in a two-sided software market. Journal of Economic Behavior & Organization, 2013, 88: 78-89.

[19] Rasch A, Wenzel T. The impact of piracy on prominent and non-prominent software developers, 2014

[20] Rochet J C, Tirole J. Platform competition in two-sided markets. Journal of European Economic Association, 2003, 1: 990-1029.

[21] Rochet J C, Tirole J. Two sided markets: A progress report. Rand and Journal of Economics, 2006, 37: 645-667.

[22] Shy O, Thisse J F. A strategic approach to software protection. Journal of Economics & Management Strategy, 1999, 8: 163-190.

[23] Stive J, Bernahrt D. Pirated for profit. Canadian Journal of Economics, 1998, 31: 886-899.

[24] Takeyama L N. The welfare implication of unauthorized reproduction of intellectual property in the presence of demand network externalities. Journal of Industrial Economics, 1994, 42: 155-166.

[25] Takeyama L N. Piracy, asymmetric information and product quality revelation, 2002

[26] Yoon K. The optimal level of copyright protection. Information Economic and Policy, 2002, 14(3): 327-348.