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Piracy of Digital Products: A Contest Theoretical Approach

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  • Hoffmann, Magnus
  • Schmidt, Frederik

Abstract

In the following, we examine a market of a digital consumption good with monopolistic supply. In this market, it is the ability of the consumer to bypass (”crack”) the copy-protection of the monopolist which induces a lower price of the digital good, compared to an uncontested monopoly (textbook case). We analyze the complex relationship between the cracking efforts of the consumer, the copy-protection efforts and the pricing decision of the monopolist, and the welfare of the economy. We find, for example, that the monopolist will deter piracy if the (exogenous) relative effectiveness of the consumer’s bypassing activity is low compared to the copy-protection technology. In this case welfare is lower than the welfare in the textbook case. On the contrary, welfare rises above the textbook case level if the relative effectiveness of cracking is sufficiently high.

Suggested Citation

  • Hoffmann, Magnus & Schmidt, Frederik, 2007. "Piracy of Digital Products: A Contest Theoretical Approach," MPRA Paper 3289, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:3289
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    References listed on IDEAS

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    More about this item

    Keywords

    Digital Products; Contests; Security of Property Rights; Endogenous Monopoly Price;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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