Digital Piracy and Bundling of Information Goods

Abstract

Bundling of information goods is quite common. As prior research shows, bundling is particularly profitable in their case because their marginal production cost is zero. However, information goods are known to be prone to piracy, and it is still not clear what impact, if any, piracy can have on the appeal of bundling. To address this, we reexamine bundling in the backdrop of piracy. We find that piracy diminishes the appeal of bundling to the extent that selling separately may become optimal despite zero marginal cost. Interestingly, even when product valuations are negatively correlated and bundling is anticipated to be even more effective, separate selling can be surprisingly optimal in the presence of piracy. This impact of piracy carries over to situations where a fraction of the users are ethical and do not consider piracy to be an option. Furthermore, piracy elevates the relative appeal of separate selling so much so that even mixed bundling becomes ineffective in certain situations. Collectively, our results point to the insight that the purported benefits of bundling may not fully materialize in the presence of piracy.