Academic journal article Canadian Social Science

An Analysis of Copyright Protection Strategy with Customers Category and Network Externality

Academic journal article Canadian Social Science

An Analysis of Copyright Protection Strategy with Customers Category and Network Externality

Article excerpt

Abstract

Illegal reproduction is increasingly becoming a major concern of companies and the society. Previous research has shown when network effect is strong, piracy could be beneficial for firms. However, some researchers got that strong network effects can sometimes lead to a firm choosing higher levels of copyright protection. How to choose the investment strategy for firms in this society with prevalent piracy? There are two strategies: no copyright protection and setting copyright protection. We address two questions in a monopoly and duopoly setting. Frist, what effects the attractiveness of each of the two strategies? Second, under which conditions will any particular strategy dominate another? We show that in a monopoly setting, firms prefer not to take a copyright protection with higher level of network effect and more support-piracy consumers. In a duopoly setting, the equilibrium of game theory is at the choice of the strategy of copyright protection.

Key words: Piracy; Network externality; Copyright protection strategy; Customer category

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Recently, more and more illegal reproduction of products is becoming a large concern for both the society and the industry. In 2010, the Business Software Alliance said that 42% of software is pirated, which leads to an estimated loss of more than $59 billion to firms. However, copying of intellectual property is not limited to software. Piracy of music and movies is a major concern to the society, and some researchers have suggested that it will lead to radical changes in the industry (Moul, 2006). With growth of Internet, piracy is becoming even more prevalent because copying of intellectual properties is becoming easier and more difficult to prevent. And some companies have also tried to combat piracy by making their products more difficult to cope using digital rights management software. For example, Intuit incorporated a feature in its 2003 TurboTax such that the software could only be installed on one computer and Windows XP has an activation code; and some other companies never take any measure to prevent the piracy.

If piracy can increase the market size, when exist network externality, then company may get some income because of piracy. Recently some researchers have done some work about this. For example Conner and Rumelt (1991) and Takeyama (1994) assume that copying by individuals confers a network externality that benefit users of the product. Shy and Thisse (1999) extent the monopoly results of Conner and Rumelt (1991) and Takeyama (1994) to a duopoly framework and divided the consumers into two categories, high-valuation consumers who do not copy and low-valuation consumers who potentially can copy. Their results show that firms can benefit by not protecting their software if network externality is strong with allowing piracy increases the market size. When piracy can increase the market size, piracy is beneficial for the firms. But if piracy couldn't increase market size, in a saturated market or market with limited growth opportunity, some previous researchers have examined this situation. Jain (2008) examined if the market is saturated and there is limited opportunity for market growth, higher network effect can actually lead to higher levels of copyright protection. Some other researchers showed that a corporation may choose different copyright strategy in different place with different piracy rate, for example, Ye (2006) have examined Microsoft has different strategy in different country and region. He will choose high levels of copyright protection if there has high piracy rate, vice versa. So we can see that different ratio of consumers would affect the choice of firms. And the purpose of this paper is examining the effect of ratio of consumers to the strategy of firms.

This paper base on Shy and Thisse (1999), reexamine the effect of network and initial ratio of consumers to the choice of firms' copyright protection strategy, when the market is saturated and there is limited opportunity for market growth. …

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