Price discrimination and copyright protection in software
Oz Shy (The economics of network industries, 2001) argues that it can be rational for a software firm to permit the piracy of its software.
The assumptions made are:
- the firm has a monopoly
- it would be costless to install devices that prevent piracy
- consumers are divided equally between those who are willing to pay extra for support from the firm and those who are not
- support is bundled with the purchase of the software, and illegal software users cannot obtain it from elsewhere
- the more people use the software, the better it is for each user (network externality)
Under these conditions, the optimal strategy for the software firm depends on how much value is placed on support by the consumers who want it. If this value is low, the firm will have to make its money by selling the software. In that case, it makes sense to protect the market by installing anti-piracy devices.
But if some consumers place a high value on customer support, the price of the bundle (software + support) can be higher to reflect that. The existence of a large pool of “pirate” users drawn from the “non-support-using” segment of the market will encourage more purchases among the “support-using” segment (because software is more useful if it has numerous other users). The software firm can ensure a maximum number of users – and thus, a maximum number of purchases among the “support-using” segment – by not blocking piracy.
Another way to think about this is as an example of price discrimination, with some customers being charged nothing.