Pricing information goods with piracy and heterogeneous consumers

Waters, James (2013): Pricing information goods with piracy and heterogeneous consumers.

Abstract

We present an information good pricing model with persistently heterogeneous consumers and a rising marginal propensity for them to pirate. Three offsetting pricing mechanisms occur: skimming, compressing price changes, and delaying product launch. We identify a novel trade off in piracy's effect on welfare. We find that piracy quickens sales times and raises welfare in fixed capacity markets, and does the opposite in growing markets. In our model, consumers benefit from piracy except at very high rates in rapidly expanding markets, legal sellers always dislike it, and pirate providers like high but not very high rates. Purchase delay, transient heterogeneity, inelastic demand, and network externalities reduce piracy's effect, but demand uncertainty doesn't.

• Item Type: MPRA Paper
• Language: English
• Keywords: Information goods; software; piracy; skimming; intertemporal price discrimination; prices; pricing; welfare
• Subjects: D - Microeconomics > D6 - Welfare Economics > D60 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L8 - Industry Studies: Services > L86 - Information and Internet Services ; Computer Software

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