Managing digital piracy under consumer valuation uncertainty: The roles of product demonstrations and antipiracy measures

Abstract

Product demonstrations (e.g., software or video game trials) are commonly used in digital-good markets to resolve prospective consumers’ valuation uncertainty. We theoretically investigate how a monopolistic digital-good firm may utilize the tool of product demonstration, together with technical and legal antipiracy measures which increase the difficulty or cost of pirating, to optimally manage the impact of piracy on its new product’s profitability. We unexpectedly find that, in equilibrium, the firm’s profit may strictly decrease with the difficulty of pirating when the true product quality is not especially high, such that the firm chooses not to offer product demonstrations. This is because, with higher piracy costs, the firm has more incentive to offer product demonstrations and, as a result, rational customers’ quality belief conditional on non-demonstration is lower, which leads to a lower profit for the firm. We extend our model to incorporate consumers’ fit uncertainty about the product due to idiosyncratic tastes. Related managerial implications for public policy and legislation regarding piracy and copyright are discussed.