Research: Piracy can boost legitimate sales

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Research analysis by three US academics has found that a moderate level of piracy can have a positive impact on the bottom line for both the manufacturer and the retailer – and not at the expense of consumers.

“When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer while, at the same time, enhancing consumer welfare,” wrote Antino Kim, assistant professor of operations and decision technologies at Kelley, and his co-authors, Atanu Lahiri, associate professor of information systems at the University of Texas-Dallas, and Debabrata Dey, professor of information systems at the University of Washington.

In the research, The ‘Invisible Hand’ of Piracy: An Economic Analysis of the Information-Goods Supply Chain, published in the December 2018 issue of MIS Quarterly, Kim and his co-authors study the economic impact of piracy on the supply chain of information goods (e.g., music, movies, TV shows, video games, ebooks, and software).

The authors explain that the economic rationale for this surprising result is rooted in how piracy interacts with the problem of double marginalisation and provide useful insights for management and policy.

Kim and his colleagues found that piracy can actually reduce, or completely eliminate at times, the adverse effect of double marginalisation, an economic concept where both manufacturers and retailers in the same supply chain add to the price of a product, passing these mark-ups along to consumers.

They found that, because piracy can affect the pricing power of both the manufacturer and the retailer, it injects ‘shadow competition into an otherwise monopolistic market. “From the manufacturer’s point of view, the retailer getting squeezed is a good thing,” explained Kim. “It can’t mark up the product as before, and the issue of double marginalisation diminishes. What we found is, by both of them being squeezed together – both at the upstream and the downstream levels – they are able to get closer to the optimal retail price that a single, vertically integrated entity would charge.”

They suggest that businesses, government and consumers rethink the value of anti-piracy enforcement, which can be quite costly, and consider taking a moderate approach.

Kim and his colleagues also found that when enforcement is low and piracy is rampant, both manufacturers and retailers suffer. But they caution against becoming overzealous in prosecuting illegal downloaders or in lobbying for more enforcement. “Our results do not imply that the legal channel should, all of a sudden, start actively encouraging piracy,” they said. “The implication is simply that, situated in a real-world context, our manufacturer and retailer should recognise that a certain level of piracy or its threat might actually be beneficial and should, therefore, exercise some moderation in their anti-piracy efforts.

“This could manifest itself in them tolerating piracy to a certain level, perhaps by turning a blind eye to it,” they add. “Such a strategy would indeed be consistent with how others have described HBO’s attitude toward piracy of its products.”

 

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