The effects of market size, wealth, and network effects on digital piracy and profit

The effect of digital piracy is often framed as a creator having to compete against unauthorized copies of their own creation, despite intellectual property rights laws. This framing has empirical and theoretical support, but the empirical findings often suggest that the magnitude and even sign of piracy effects depend on the characteristics of the software and the market. For example, piracy seems to have a larger negative effect on sales of high-profile works, but a smaller and perhaps even positive effect on lesser-known works. This paper seeks a theoretical explanation of differential piracy effects. It is unique in that it gives considerable focus to the market size, and also to budgetary limitations of the consumer base, motivated by high piracy rates in developing countries. The models imply that piracy is more likely to help developers when the market for the software is smaller; when network effects are neither too weak nor too strong; when piracy is neither to accessible nor too inaccessible; when the cost of piracy is relatively homogeneous; and when the consumer base is not too poor. All things considered, the inclusion of market size, consumer budgets, and heterogeneous piracy costs suggest that piracy is less likely to be beneficial to developers than previous literature suggest. Developer profit may be higher or lower with piracy, but buyer welfare is no worse, and is sometimes better, with piracy.