Markets of information goods facing a strong P2P network

Abstract

This paper studies a traditional monopolistic market of information goods in the presence of an inherently strong peer-to-peer file-sharing network. Specifically, such a strong network is made possible by a few fanatic users who selflessly contribute to the sharing of files. We find that the most prevalent equilibrium outcome is the one where the firm accommodates the network and competes in price. We establish that coordination failure in the forming of networks is not an issue once we consider a high level of taste heterogeneity and include such fanatic users in the model. We also find possible network-deterring market structures, although these can only happen under limited circumstances. Furthermore, it is not impossible to see the firm and the network co-existing as local monopolies not serving the entire market and therefore not competing. For this market structure to occur, the taste heterogeneity has to be very large. Finally, we find that in all the equilibrium structures, total welfare always decreases in taste heterogeneity and the generic cost factor of downloading. JEL classification: L11; L82; L86.