Piracy prevention and the pricing of information goods

This paper studies the effects of piracy on prices and welfare and determines the optimal
enforcement policy. A monopolist sells an information good at a non-linear price in two
versions designed for two types of consumers with different willingness to pay. Consumers
with low willingness to pay consumers can copy the good at some cost and with some
quality loss. High valuation customers cannot engage in full-fledged piracy. However, they
can consume the version designed for the other customer type. We show that copying or
piracy may be welfare enhancing because it enables a good to be provided to individuals
with a low willingness to pay without undermining the producing firm’s ability to finance
the development cost via the pricing scheme applied to high valuation consumers. There
are then three levels of piracy control. The highest is that chosen by the private monopoly.
The next level is the one chosen by a welfare-maximizing monopoly. The lowest level,
which can be zero, is the level of control chosen by the public authority when the good
is sold (and priced) by a profit-maximizing monopoly.
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