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Welfare implications of piracy with dynamic pricing and heterogeneous consumers

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  • Waters, James

Abstract

We present an information good pricing model with persistently heterogeneous consumers and a rising marginal propensity for them to pirate. The dynamic pricing problem faced by a legal seller is solved using a flexible numerical procedure with demand discretisation and sales tracking. Three offsetting pricing mechanisms occur: skimming, compressing price changes, and delaying product launch. A novel trade-off in piracy’s effect on welfare is identified. We find that piracy quickens sales times and raises welfare in fixed size markets, and does the opposite in growing markets. In our model, consumers benefit from very high rates of piracy, legal sellers always dislike it, and pirate providers like moderate but not very high rates.

Suggested Citation

  • Waters, James, 2015. "Welfare implications of piracy with dynamic pricing and heterogeneous consumers," European Journal of Operational Research, Elsevier, vol. 240(3), pages 904-911.
    • Handle: RePEc:eee:ejores:v:240:y:2015:i:3:p:904-911
    DOI: 10.1016/j.ejor.2014.08.022
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    Cited by:

    1. Rodrigo Nobre Fernandez & Felipe Garcia Ribeiro & Jean Del Ponte Duarte, 2018. "Effects of Software Piracy on Economic Growth," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(6), pages 1-11, June.
    2. Herings, P. Jean-Jacques & Peeters, Ronald & Yang, Michael S., 2018. "Piracy on the Internet: Accommodate it or fight it? A dynamic approach," European Journal of Operational Research, Elsevier, vol. 266(1), pages 328-339.
    3. Dan Wu & Guofang Nan & Minqiang Li, 2020. "Optimal Piracy Control: Should a Firm Implement Digital Rights Management?," Information Systems Frontiers, Springer, vol. 22(4), pages 947-960, August.
    4. Ramos, Raúl & Silva, Hugo E., 2023. "Fare evasion in public transport: How does it affect the optimal design and pricing?," Transportation Research Part B: Methodological, Elsevier, vol. 176(C).
    5. Abhishek Srivastava & Arqum Mateen & Gopalakrishnan Narayanamurthy & Suman Niranjan & Ashutosh Sarkar, 2024. "Impact of gray markets on strategic channel choice and social welfare," Annals of Operations Research, Springer, vol. 340(2), pages 1035-1062, September.
    6. Ning, Yu & Xu, Su Xiu & Yan, Mian & Huang, George Q., 2018. "Digital pricing with piracy and variety seeking," International Journal of Production Economics, Elsevier, vol. 206(C), pages 184-195.
    7. Yu Ning & Su Xiu Xu & George Q. Huang & Xudong Lin, 2021. "Optimal digital product auctions with unlimited supply and rebidding behavior," Annals of Operations Research, Springer, vol. 307(1), pages 399-416, December.

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