The Interaction between Private and Public IPR Protection in a Software Market: A Positive and Normative Analysis

Abstract

Two software developers, each o¤ering a product variety of di¤erent (exogenously given) quality, compete in prices for heterogeneous users who choose from purchasing a legal version, using an illegal copy, and not using a product at all. Using an illegal version violates intellectual property rights (IPR) and is thus punishable when disclosed. If a developer considers the level of piracy as high, he can introduce protection for his product in the form of restricting support and other services to illegal users. We study the positive and normative implications of the interaction between a regulator's IPR protection and the IPR protection that producers themselves may undertake to protect their IPR against the end users'software piracy. In particular, we aim to establish when the two forms of IPR protections (public and private) act as complements and when as substitutes to each other. Finally, we explore the situations in which there is (or is not) a con ‡ict of interest between the regulator and the developers in this respect.

Modeling Software Piracy Protection: Monopoly versus Duopoly

“…In this case, however, the cross-price elasticity is zero, since, as we will see, there is a bu¤er of illegal users positioned between the two groups of legal users (see Figure 2). The relevant insights of this setup are rather close to those from monopoly market structure (see µ Zigić et al 2013).…”

“…This would imply that the choice of qualities would occur only after the regulator sets the optimal X. The problem with this approach, however, is that it might be di¢ cult to commit to a particular level of expected penalty given its stochastic nature (even though there is pirated version of A and the legal version of product B are almost perfect substitutes then, so the loss in the consumer surplus and in the expected revenue is relatively small compared to the gain in the developers'pro…ts due to the absence of piracy (see µ Zigić, et al, 2013 for more on this case).…”