Endogenous IPR protection, commercial piracy, and welfare implications for anti-piracy laws

Abstract

ABSTRACT In the presence of commercial digital piracy, should the government provide costly protection for intellectual property rights (IPR)? Under what conditions will government protection and private protection be substitutes or complements? We show that a product’s original developer has an incentive to bear R&D costs for private protection when the quality of a pirated copy is moderate. We consider that the welfare-maximizing government determines its costly IPR protection and commits a fraction of the pirate’s monetary fines to the developer for compensation while striking a balance in the enforcement budget. In this case, the government will not launch costly IPR enforcement unless the pirated copy’s quality is sufficiently high. Otherwise, government IPR protection is socially undesirable. These results suggest that government protection and private protection are substitutes.