Anti-piracy policy and quality differential in markets for information goods

ABSTRACT In this paper we analyze the strategic decisions of the government, the incumbent and the pirate in a market where the good is piratable. Like in other studies, we show that deterred or accommodated piracy can occur in equilibrium, but pure monopoly cannot occur for any anti-piracy policy. We prove that the initial quality differential between the original and the pirated product is essential to explain the effects of an increase in the quality of pirated product on both the level of piracy and the optimal monitoring rate. Assuming a one-stage entry process and a

sufficiently high quality differential, we show that the incumbent always prefers to move first and make a credible commitment to a price. However, this is not true with a two-stage entry process.