Seminario18/23: Francisco Martínez-Sánchez (U. Murcia) – Avoiding Commercial Piracy when Consumers are Loss Averse

Información

Abstract: I analyze how the loss aversion of consumers affects the strategies of the government and the incumbent to avoid commercial piracy and the price competition between the incumbent and the pirate. To that end, I develop a sequential duopoly model of vertical product differentiation with price competition in which consumers have a reference-dependent utility. The loss aversion of consumers implies less effort from the government to achieve the outcome where the incumbent sets a low enough price to avoid commercial piracy, regardless of the quality of the illegal copy. Contrary to conventional wisdom, I find that blocking the pirate’s entry by the government can provide more welfare than accommodating it. However, the government will not block it because socially it is better to encourage the incumbent to establish a price low enough to deter the pirate from entering.