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Strategic Choice of Network Externality and Its Impact on Digital Piracy

Author

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  • Yuanzhu Lu

    (Central University of Finance and Economics)

  • Sougata Poddar

    (University of Redlands)

Abstract

Network externality plays a major role in the digital products market. The strength or the degree of the network externality has serious implications on the overall value or quality of the digital product. We focus on a situation where the degree of network externality of the product is a strategic choice of a digital firm that faces a commercial pirate that produces a lower quality of that product. We characterize the strategic response of the original firm to the pirate. We find the profit-maximizing degree of network externality chosen by the original firm under any cost environment and relative quality difference between the original and pirated good. Market structure and market coverage are endogenously determined in the model, which has implications with respect to piracy. We show that the relationship between profit-maximizing degree of network externality and the relative quality difference between the products can be monotonic or non-monotonic. The pirate’s response to the network effect is analyzed. Nash equilibria of the game in which both the network externality and the low quality are chosen simultaneously are also derived.

Suggested Citation

  • Yuanzhu Lu & Sougata Poddar, 2018. "Strategic Choice of Network Externality and Its Impact on Digital Piracy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 139-160, February.
    • Handle: RePEc:kap:revind:v:52:y:2018:i:1:d:10.1007_s11151-017-9581-0
    DOI: 10.1007/s11151-017-9581-0
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    References listed on IDEAS

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    Cited by:

    1. Yuanzhu Lu & Sougata Poddar, 2019. "Limiting End-user Piracy - The Role of Private and Public Anti-Piracy Measure," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 181-197, May.
    2. Wu, Di & Sun, Ji & Wang, Leonard F.S. & Liu, Huizhong, 2024. "Network externalities in a vertically differentiated luxury goods market," Mathematical Social Sciences, Elsevier, vol. 128(C), pages 100-109.
    3. Barrachina, Alex & Forner-Carreras, Teresa, 2022. "Market must be defended: The role of counter-espionage policy in protecting domestic market welfare," Information Economics and Policy, Elsevier, vol. 58(C).
    4. Kresimir Zigic & Jiri Strelicky & Michal Kunin, 2020. "Private and Public IPR Protection in a Vertically Differentiated Software Duopoly," CERGE-EI Working Papers wp671, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    Vertical product differentiation; Network externality; Market structure; Market coverage; Investment cost;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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