Essays on the Issue of Piracy in the Market of Information Goods

Thesis (Ph.D.)--University of Washington, 2016-06

Copyright infringement in markets of information goods---commonly known as piracy---has remained amongst the top concerns for the manufacturers as well as for governments around the world. There exists an extensive body of literature that discusses the issue of piracy along with possible remedies and responses for the manufacturers and policymakers. In my dissertation, I intend to contribute to that stream. First, I study the economic impact of piracy on the supply chain of information goods. When information goods are sold to consumers via a retailer, in certain situations, a moderate dose of piracy seems to have a surprising positive impact on the profits of the manufacturer and the retailer, while, at the same time, enhancing consumer welfare. Clearly, such a "win-win-win" situation is not only good for the overall supply chain, but is also beneficial for the overall economy. I argue that the economic rationale for this surprising result is rooted in how piracy interacts with the problem of double marginalization. I explain this rationale and develop useful insights for management and policy. Moving on to the supply-side of piracy---which has largely been abstracted away in prior literature---I compare the effects of different types of anti-piracy policies. I propose a clear distinction between efforts that restrict supply of pirated goods (supply-side enforcement) and those that penalize illegal consumption (demand-side enforcement). In my effort to compare these two different types of enforcement, I construct a parsimonious model that endogenizes the supply of pirated goods. Specifically, I capture the reality that download activities generate ad revenues for the uploaders in the piracy ecosystem, and it is that mechanism that incentivizes the suppliers of pirated goods to upload illegal content. In my analyses, perhaps expectedly, I find the two types of anti-piracy measures to have similar impacts on the profit and welfares in the short-run, where the cost of development is sunk, and the decision of the firm is only about pricing the product. However, surprisingly, in the long-run---where the manufacturer can respond to piracy by changing its product quality as well---the two different enforcement measures may have contrasting socioeconomic implications. All in all, supply-side enforcement turns out to have a much more desirable impact in the long run. I provide explanations for my findings and discuss the implications from the perspectives of the manufacturer, consumers, and policymakers.