Piracy, Awareness and Welfare in a Required Aftermarket

Many industries have two sales stages: the primary market and the aftermarket. Existing research shows consumers are routinely unaware of aftermarkets (Cruickshank, 2000; Hall, 2003); and due to legal or structural restrictions, firms commonly have monopoly power (Borenstein et al., 2000; Adelmann, 2010). However, the primary market could be a great deal more competitive. Examples of this sales process include products with service agreements, software with in-app purchases, and durable goods with required replacement parts. But in many of these aftermarkets, the consumer has the option to obtain the aftermarket product through non-traditional means (e.g. âpiracyâ). We model such an environment by combining the two most common travel cost models: A Salop circle (Salop, 1979) for the primary market and a Hotelling linear city (Hotelling, 1929) for the aftermarket. We find that firms with more competition in the primary market will spend more on âenforcementâ (disincentivising non-traditional acquisitions) and reduce prices in the primary market so they may exhibit more market power in the aftermarket. This is in direct contradiction with the common belief that anti-piracy efforts are the domain of âbig businessâ (Tan, 2002; Kwong et al., 2003; Lysonski and Durvasula, 2008). Further, we find that it is social welfare enhancing for âenforcementâ spending to be as effective as possible.