Which Enemy to Dance with? A New Role of Software Piracy in Influencing Antipiracy Strategies

Abstract

This paper studies how software firms should determine their antipiracy efforts and product prices. There are two unique aspects of our model. First, antipiracy efforts have both a direct effect and a cross effect on software piracy. Second, we capture two types of competitions when piracy exists: one between a legitimate product and its pirated counterpart, and the other between two pirated products. We show that due to pirated products’ buffer effect not studied before, eliminating piracy does not necessarily mean higher profit for firms. This reveals an unexplored advantage of desktop software comparing with Software as a Service that can eliminate piracy. Direct and cross effects have different impacts on firms’ decisions and profits. Opposite to what one might expect, when a firm’s antipiracy effort becomes more effective in increasing the cost of pirating its own product but not its competitor’s product, the firm becomes worse off under certain conditions. By contrast, if the effort’s cross effect is higher, therefore increasing the cost of pirating its competitor’s product, a firm will always be better off. The managerial implication is that if a firm ignores the cross effect, it could under-invest in anti-piracy effort, causing its profit to suffer.