An Economic Analysis of Platform Protection in the Presence of Content Substitutability

Abstract

Online platforms, such as App Store and Kindle, are facing a common dilemma: while the implementation of technology-based protection impedes piracy and hence boosts demand from legal users (positive effect), the resulting restriction meanwhile imposes some level of disutility on the same due to inconvenience (negative effect). This paper investigates a monopolistic platform’s optimal protection level and pricing strategy under an agency business model (content agency model or advertising agency model). We find that the platform’s protection strategy hinges on the relative magnitude of the two opposing effects of protection. When the negative effect dominates, the minimal protection is optimal. However, as the positive effect becomes more salient, the platform has an incentive to increase the protection level. We also find that although the demand of non-pure platform users always increases as the level of content substitutability rises under the minimal and maximal protection regions, it is not necessarily the case under the medium protection region. The study advances our understanding of the content protection against piracy from a platform’s perspective. Our findings also provide insights into business model decision when platform protection is endogenously determined.