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Piracy and limited liability

Ming Chung Chang, Chiu Fen Lin and Dachrahn Wu
Journal of Economics
Vol. 95, No. 1 (October 2008), pp. 25-53
Published by: Springer
Stable URL: http://www.jstor.org/stable/41795572
Page Count: 29
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Piracy and limited liability
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Abstract

This paper analyzes the effects of end-user piracy on a monopolized software industry with network effects in which consumers have heterogeneous income and limited liability. Limited liability produces a piracy cost which increases with income. The monopolist thus may be able to exploit the network effect brought about by the piracy of low-income consumers to charge a higher price to high-income consumers thereby earn a higher profit, especially when the monopolist can prevent the network effect from spilling over to the high-income consumers. If intellectual property rights policies are severe enough, then the monopolist can avoid the spillover. Otherwise it may become a case where each high-income buyer benefits from the piracy but the monopolist is hurt. However, a severe policy may bring about a high piracy rate since it invites the monopolist to raise the price.

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