Impact of Piracy on Innovation at Software Firms and Implications for Piracy Policy

Transcription

1 Assoiation for nformation Systems AS Eletroni Library (ASeL PACS 007 Proeedings Paifi Asia Conferene on nformation Systems (PACS 007 mpat of Piray on nnovation at Software Firms and mpliations for Piray Poliy Jeevan Jaisingh HKUST, Follow this and additional wors at: Reommended Citation Jaisingh, Jeevan, "mpat of Piray on nnovation at Software Firms and mpliations for Piray Poliy" (007. PACS 007 Proeedings This material is brought to you by the Paifi Asia Conferene on nformation Systems (PACS at AS Eletroni Library (ASeL. t has been aepted for inlusion in PACS 007 Proeedings by an authorized administrator of AS Eletroni Library (ASeL. For more information, please ontat elibrary@aisnet.org.

2 11th Paifi-Asia Conferene on nformation Systems 4. mpat of Piray on nnovation at Software Firms and mpliations for Piray Poliy Jeevan Jaisingh Department of nformation & Systems Management, HKUST Clear Water Bay, Kowloon Hong Kong Abstrat A Business software alliane (BSA ommissioned study in 006, found that $34 billion was lost due to piray of software in 005. The BSA and its members invest signifiant resoures in eduating users about opyright, its value, and enforing opyright laws. However, does effort spent in eduating users about the harmful aspets of piray, and taing ation against end-users using pirated software always result in higher quality software? n this paper, we loo at how innovation in the presene of piray is affeted by the poliy hoie of allianes suh as the BSA. Surprisingly, we find that a striter piray poliy, that inreases the pereived ost to using pirated software for end-users, may in some ases lead to an inrease in piray (demand for pirated produts, and a derease in produt quality. Thus an ative BSA that tries to eduate onsumers and taes legal ation against onsumers, may atually be promoting piray and hurting innovation in some ases. An intuitive rationale for this is that, in some regions, quality hoie by the firm and the poliy hoie by the BSA are strategi substitutes in the fight against piray. Thus an inrease in the poliy variable by the BSA, maes the firm hoose a lower quality. Depending on the lielihood that the pirated produt is funtional, the BSA would hoose a piray poliy ranging from an inative to a very ative poliy. Keywords: Software piray, Poliy, Quality, nnovation ntrodution A Business software alliane (BSA ommissioned study (BSA 006 found that $34 billion was lost due to piray of software in 005. n its fight against piray, the software industry has ombined fores through allianes suh as the BSA, and the software publishers alliane (SPA. These allianes eduate onsumers on software management and opyright protetion, yber seurity, trade, e-ommere, and other nternet-related issues. They also wor with law enforement agenies in several ountries to tae ation against pirates. The main advantage of these allianes is the tremendous eonomies of sale in fighting piray. The BSA study found that ountries varied in their piray rate, ranging from Vietnam at 90%, to the United States at 1% (BSA 006. The large variane in piray rates ould possibly be attributed to ultural differenes, and the ations taen by allianes suh as the BSA and the SPA in the speifi ountries. An often ited reason by software firms for building up their ase against piray, is the detrimental impat of piray on innovation. "Strong intelletual property protetion spurs reativity, whih opens new opportunities..." - CEO, BSA (Gross

3 11th Paifi-Asia Conferene on nformation Systems We loo at how innovation (quality is affeted by the poliy hoie of allianes suh as the BSA when piray is prevalent. The BSA and its members invest signifiant resoures in eduating users about opyright, its value, and enforing opyright laws (BSA Enforement. Does effort spent in eduating users about the harmful aspets of piray, and taing ation against end-users using pirated software always result in higher quality software? These are the issues we address in this paper. These issues are of interest not just to allianes suh as the BSA, and software firms, but also to a soial planner suh as the government in deiding publi poliy regarding piray. Empirial studies on the impat of piray on the quality hoie of firms, are understandably hard beause of the inherent diffiulty in operationalizing a measure for quality. The analytial approah would provide intuition on the long term impat of piray poliies on welfare, quality hoies, and prie ompetition. The two most ommon forms of piray are end-user piray (friends sharing opyrighted software and ounterfeiting (large sale dupliation of illegal software. This paper is about the latter. Software ompanies estimate they lost $1 billion in revenue in 000 beause of ounterfeiting. That is 15% of the industry s $80 billion in worldwide sales (wata, 001. Counterfeit versions of popular software are available at a muh lower prie on the nternet and from street peddlers. Mirosoft s Offie XP for example (original retail prie $479 was available at aution sites in 001 for $00. Aording to Mirosoft, there s a 90 perent hane the diss are ounterfeit (Wood 001. Organized piray or ounterfeiting is thus a major ause of onern to software firms. Surprisingly, ounterfeiting has reeived little attention in the piray literature. The impat of piray poliies on innovation, and priing strategies of the firm in the presene of a ounterfeit supplier, is the fous of this paper. The environment that we study onsists of a firm that develops a software, a pirate that reates an illegal opy of the software, and an alliane suh as the BSA whih implements piray poliies (legal ation, eduating users about the detrimental effets of piray et.. The maret for the software is shared between the firm and the pirate. Consumers differ in their ethial ost to pirate. The ethial ost to pirate is a funtion of the level of the poliy hoie variable. A striter piray poliy inreases the ethial ost for onsumers to pirate, thus affeting the demand for pirated produts. We develop a game theoreti model in whih the BSA hooses the piray poliy first. After observing the poliy hoie by the BSA, the firm hooses the quality of software. n the final stage, after quality has been hosen, the firm and the pirate hoose pries simultaneously, nowing how pries are going to affet demand. We use baward indution to solve the game: we first determine the optimal pries for both firm and pirate, given that they hoose pries simultaneously, and that they observe the quality hoie by the firm and the poliy hoie of the BSA. Then based on these optimal pries, we alulate the optimal quality hosen by the firm, given that the firm observes the poliy hoie of the BSA. Finally based on the optimal quality hoie of the firm, and the optimal pries harged by both the firm and the pirate, we alulate the optimal poliy hoie by the BSA. We find that when the firm nows it has a superior produt, and that the poliy hoie by the BSA is low, then it should prie aggressively to mae it unprofitable for the pirate to exist in the maret. Also, when the firm nows it doesn t have a high quality produt, but the BSA has hosen a high poliy hoie, it does not engage in an aggressive priing strategy, and leaves a small segment of the maret for the pirate. Surprisingly, we find that a striter piray poliy that inreases the pereived ost to using pirated software for end-users, may in some ases lead to an inrease in piray (demand for pirated produts, and a derease in produt quality. Thus an ative BSA, that tries to eduate onsumers, and taes legal ation against onsumers, may atually be promoting piray and hurting innovation in some ases. An intuitive rationale for this is that, in some regions, quality hoie by the firm, and the poliy

4 11th Paifi-Asia Conferene on nformation Systems hoie by the BSA are strategi substitutes in the fight against piray. Thus an inrease in the poliy variable, maes the firm hoose a lower quality. Regarding the optimal poliy hoie by the BSA, we find that, when the lielihood that the pirated software will be funtional is low, then it is non-optimal for the BSA to expend any ost to redue piray. When it is medium, then a high level of poliy hoie is optimal only for high values of tehnology ost and low values of poliy ost. When the lielihood that the pirated software will be funtional is high, then, the BSA should almost always hoose a high level of poliy hoie. The rest of the paper is organized as follows: in Setion we over the relevant literature. The basi model is set up in Setion 3. Finally we disuss the managerial impliation of the results and diretions for future researh in Setion 4. All proofs have been ept out of the paper for brevity. Baground Novos and Waldman (1984 distinguish between two types of effets of piray on soial welfare: the first effet is the loss due to underprodution, and the seond is the positive welfare effet due to derease in loss due to under-utilization. The underprodution loss omes from the dereased inentive for firms to innovate in the presene of piray, whih leads to redued variety, or redued quality in the long term. Derease in loss due to underutilization results from more onsumers getting to use the software as a result of piray. n this paper our fous is on the loss due to underprodution. One of the ey differenes between our paper and Novos and Waldman (1984 is that our results don t depend on the speifiation of the onsumer distribution funtion (more detail explained later. n Novos and Waldman (1984 however, the ey result is obtained with a restrited onsumer distribution funtion. Speifially, we loo at how innovation (quality is affeted by the poliy hoie of allianes suh as the BSA, when piray is prevalent. Most of the software piray literature (Conner and Rumelt 1991; Chen and Png 003; Shy and Thisse 1999 addresses end-user piray as opposed to organized pirating by a firm (ounterfeiting (Banerjee 003. Previous papers that have looed at end-user piray have studied the impat of protetion strategies on pries and profits in a monopoly setting (Conner and Rumelt 1991, and in a duopoly setting (Shy and Thisse They find that, when networ externalities are high enough, then non-protetion is optimal. Chen and Png (003 study the problem of a soial planner, who has three poliy hoies: to tax the opying medium, to subsidize legal sales and to fine offenders. They find that, from a welfare perspetive, providing subsidies to users is optimal ompared to taxing the opying medium, or penalizing opiers. Banerjee (003 studies the optimal monitoring rate and fine to harge a pirate in a setting where the maret is shared between the firm and the pirate. The paper finds that welfare imization may or may not result as the soially optimal outome. The impat of the reliability of the pirated software, and the impat of networ externality on the poliy variable are also studied. Chen and Png (003 mention that the long term impat of poliy hoie on innovation has reeived little attention. Novos and Waldman (1984 loo at the impat on quality hoies by a firm in an end user piray setting. They find that quality hoies are below the soially optimal level in the presene of piray. The setting in our paper is perhaps losest to Banerjee (003. Both papers loo at ounterfeiting. We loo at the impat of poliy on quality and prie hoies of firms, Banerjee studies the impat on pries. Poliy affets the supply of pirated software in (Banerjee 003, while it affets the demand side of the maret in our paper. From a researh question perspetive, this paper is in the same vein as Novos and Waldman (1984. However, they loo

5 11th Paifi-Asia Conferene on nformation Systems at an end user piray setting, and the impat of poliy on the quality hoies of firms is not studied. A reent woring paper (Bae and Choi 003 studies the impat of intelletual property right protetion on innovation. They operationalize the intelletual property right protetion through a reprodution ost and a degradation ost. Both are exogenous parameters that allow omparative statis on optimal quality hoie. Unlie this paper (Bae and Choi 003, our poliy variable is endogenous and we study the impat of ompetition. Gopal and Sanders (1997 distinguish between preventive and deterrent measures to fight software piray and show in a setting with lub formation, that using deterrent measures is optimal. Another paper by the same authors (Gopal and Sanders 1998 develops an eonomi model that provides the rationale for the relutane of a number of governments to aggressively enat and enfore intelletual property rights. The model inorporates the inentive strutures for governments, software publishers, and individual onsumers. Model There is a firm that produes a produt (software of quality, q,atprie, p. Quality of the software means two things: first software that has fewer bugs is of a higher quality. Seond, software with more features (e.g. graphial analysis, regression analysis et. in a mathematial analysis software is of a higher quality. All onsumers value the software equally at its quality. There exists a pirate who sells a pirated version of this produt at prie, p.the quality of the pirated software is, q ( 0 1. is the lielihood that the pirated software is funtional. An artile in PC Magazine (Wood 001 notes that onsumers ould fae a variety of problems with ounterfeit software: it ould ontain a virus, or it may not be funtional; after all ounterfeiters are not nown for their quality ontrol. Alternately, aptures the degradation in the quality of the produt, due to la of ustomer support, doumentation et. Allianes suh as the BSA implement poliies, or tae ations to prevent piray. These poliies/ations may be in the form of legal ation against users, or eduating users about the harms of piray. The BSA benefits from tremendous eonomies of sale in fighting piray. Although the firm is a monopolist in its maret, there are other software firms whih also rely on the BSA to prevent piray. These poliies of the BSA inrease the pereived ost to the user of using pirated software. We denote this poliy/ation measure by,,(0. A higher (striter poliy, orresponds to a more ative role by the BSA to prevent piray. Consumers (denoted by z differ in the ethial propensity to use pirated software. z is assumed to be uniformly distributed on [0, 1]. Given a onsumer, z, the ethial ost to a onsumer of using pirated software is, z. This formulation of ost ensures that the greater the poliy measure, the greater the ost to pirate for a onsumer of type z,andfora given poliy measure, individual onsumers may differ in their ethial ost to pirate. A onsumer with a higher z, has a higher ethial ost to pirate. We summarize our notation in Table 1. The utility of a onsumer of type z : q p if onsumer buys from firm Uqz (, = q p z if onsumer buys from pirate 0 if onsumer does not buy Let ẑ be the onsumer type indifferent between buying from the firm and buying from the pirate. So q p= q p zˆ. (

6 11th Paifi-Asia Conferene on nformation Systems The firm s demand: The pirate s maret share is ẑ. p p + q q zˆ = ( p p + qq d = 1 zˆ = 1 (3 Table 1: Notation Notation Desription q Quality of software. p Prie harged by firm. Lielihood that the pirated version is funtional. p Prie harged by pirate. Poliy hoie by BSA. z Ethial propensity not to pirate - onsumer s type. d f, d Firm and pirate s demand. f, Profit of firm and pirate. Quality ost oeffiient. Poliy ost oeffiient. i, j ndexes for firms in duopoly. x Loation based preferene ost. The firm pays a membership fees to the BSA for fighting piray. The membership fees is exogenous and for simpliity assume that it is zero. Considering a positive membership fees will only redue the profit funtion of the firm by this fixed amount and will not qualitatively 1 affet the nature of the results. Assuming a onvex ost funtion ( q ; > 0 for the firm to develop a produt of quality q, the orresponding profit funtions for the firm and the pirate are: p p + q q 1 f = p1 q (4 p p + q q = p (5 The BSA hooses to imize overall surplus. The game played between the firm, the pirate, and the BSA is speified in extensive form as follows: Stage 1: The BSA hooses the poliy measure. Stage : Having observed, firm hooses quality q. Stage 3: Firm and the pirate hoose pries simultaneously (Bertrand Competition. We wor bawards, first determining the optimal pries for both firm and pirate, given that they hoose pries simultaneously, and that they observe the quality hoie by firm (1. Then based on these optimal pries, we alulate the optimal quality hosen by the firm (, and then the optimal hoie of by the BSA (

7 11th Paifi-Asia Conferene on nformation Systems Priing subgame The pirate and the firm an observe the quality hoie made by the firm in the previous stage, and the poliy hoie made by the BSA in stage 1. Both hoose pries to imize profits. Proposition 1. Given a poliy hoie,, by the BSA, and a quality hoie, q, by the firm, the optimal prie for the firm, and for the pirate, and the demand for the firm are: q q q p = q, p =, d = 1 if < + q(1 + q(1 + q(1 q 1 p =, p =, d = if q 1 p = q(1, p = 0, d = 1 if > 1 Define q as the quality to poliy ratio. When the ratio is small ( q < +, the share of the q maret taen up by the pirate ( is small, hene it is optimal for the firm to extrat all the surplus from its onsumers. t harges a prie equal to quality, while the pirate harges half its expeted quality. Optimal prie set by the firm and the pirate inrease in quality, while the demand dereases with quality. A hange in poliy has no effet on the pries but dereases q 1 piray (demand for pirate. When the quality to poliy ratio is high ( > 1, a big hun of the maret an potentially be lost to the pirate, hene it beomes optimal for the firm to lower its prie to a level ( q(1, where the pirate is fored to leave the maret. n this region, an inrease in has no effet on pries or piray. An impliation from the priing in the two regions is that, when the firm nows it has a superior produt and the poliy hoie by the BSA is low, then it should prie aggressively to mae it unprofitable for the pirate to exist in the maret. Also, when the firm nows it doesn t have a high quality produt, but the BSA has hosen a high poliy hoie, it does not engage in an aggressive priing strategy and leaves a small segment of the maret for the pirate. For the range q the following observations an be made: the prie set by the firm (pirate is an inreasing (dereasing funtion of quality hoie. Similarly the demand for the firm is an inreasing funtion of quality, whih means that the demand for the pirated software (heneforth alled piray, is a dereasing funtion of quality. The impat of poliy hoie on pries is less ertain, sine it depends on how the quality hoie hanges with. There is a diret effet (+ve on the prie of the firm, due to an inrease in, and an indiret effet beause of the effet of on q. Similarly, there is a positive effet of an inrease in on the prie of the pirate. This effet is beause of the inrease in the prie of the firm with, and hene is smaller. The prie set by the pirate is also affeted by the indiret effet of on q. An inrease in has a negative effet on the demand of the firm through an inrease in prie, and an indiret effet beause of the effet of on q. Quality hoie As found in the previous setion, the optimal priing strategy is different for the three regions * * 1 speified. The quality hoie problem for the firm is: pd q, subjet to the boundary onditions of eah of the three regions. For a given value of, the firm hooses quality to

8 11th Paifi-Asia Conferene on nformation Systems imize profits in eah of the three regions. (1 08(1. (1 (1 Denoting 1 = 3, =, 3 =, 4 = 3, 5 =, and assuming that >, the following is true 0 < 1 < < 3 < 4 < 5 < 6 <. 1 3 Proposition. (a Given a poliy hoie,, by the BSA, the optimal quality hoie by the firm, optimal prie set by firm and pirate, optimal profit, and demand for firm are: Range of ** q p p f d (1 0 (1 1 4(1 6 [3(1 ] 4 6 [9 (1 ] [9 (1 ] [9 (1 ] [9 (1 ] [9 (1 ] [ ] ( + + < 4 5 < 5 < < + + ( + ( + + ( + respetively. (b Changes in optimal values with an inrease in the poliy variable are summarized below: Range of q p p f d < < < < The above result shows the optimal hoies in stage given a poliy hoie in stage 1. We find that for a range of the poliy variable ( < 4, quality hoie by the firm and the demand for the produt atually derease with a striter poliy. Also, in the range ( 0, the poliy variable has no impat on quality, pries, profit or demand. Software firms often ite the detrimental impat of piray on the inentive to innovate as a reason for inreased ation/poliy against piray. ndeed we find that for an > 4, that is the ase. However, we find that in the range ( < 4, a firm hooses a higher quality, and the piray is atually lower, when the piray poliy is relaxed. Thus an ative BSA that tries to eduate onsumers and taes legal ation against onsumers is atually promoting piray and hurting innovation in this range. Novos and Waldman (1984 find a similar result with respet to the impat of opyright protetion. Their result shows that for that for a ertain type of onsumer distribution, with inreased protetion, the quality of software might be lower. n our paper however, with the same distribution, in ertain ranges, a higher poliy variable ould have a negative effet on quality. Hene our results don t depend on the speifiation of the distribution funtion of onsumers. Graphially the above result is represented in Figure 1. When the poliy variable is below the

9 11th Paifi-Asia Conferene on nformation Systems 08(1. threshold =, it is optimal for the firm to prie low enough to fore the pirate out of the maret. Understandably, the poliy variable annot affet the prie, profit, or demand in this range, and hene flat urves in this region. Beyond this threshold level, the firm has a higher profit if it shares the maret with the pirate. t raises its prie whih results in the pirate finding it profitable to enter the maret. Note that the profit and prie harged by the firm are inreasing in beyond. 1 1 Quality (1 (1 Profit Prie Demand 0.8(1 (1 ( 3 Figure 1: Plots of hange in optimal quality, pries, demand and profits with Lemma 1. n the regions ( < 4 and ( 5 < <, the sign of sign of. For ( < d 4 q < 0 and for ( 5 < < d q > 0. d q q isthesameasthe n the region ( < sine d 1 4 q = < 0, quality hoie and poliy are strategi 3 substitutes in the fight against piray. Sine quality and poliy are strategi substitutes, q inrease in the poliy variable would lead to the firm hoosing a lower quality i.e. < 0. Other results regarding the impat of on prie, demand, and profits follow intuitively from the above result, and the disussion after proposition 1. The indiret effet of inrease in on quality is negative, and hene the demand dereases, and the prie of the pirate inreases, with. The diret effet of inrease in, dominates the indiret negative effet of on quality and so the prie of the firm inreases with. The firm inreases its prie with a striter piray poliy and extrats more surplus from its loyal ustomers. (1 For > =, the prie follows the quality, and all onsumers who buy legally earn a

10 11th Paifi-Asia Conferene on nformation Systems surplus of zero. n the range 4 < 5 the poliy variable is effetive to the extent that a higher leads to a higher quality hoie. However, a higher poliy variable does not lead to lower piray as seen by the flat demand plot in this range. For 5 <, an inrease in leads to higher quality and lower piray. Sine d q = > 0 (from Lemma 1, quality hoie and poliy are strategi omplements in the fight against piray. Sine quality and poliy are strategi omplements, inrease in the poliy variable q would lead to the firm hoosing a higher quality i.e. > 0. However even at =,thereis still a demand for the pirated produt i.e. the demand for the firm < 1. Poliy hoie The BSA hooses the poliy variable to imize the total surplus. Left alone, the BSA would only are about the profit of the firm. However, given that the BSA depends on the government for support in implementing its poliies, the government an have enough influene on the BSA, for it to onsider imizing the surplus of the legal onsumers also. Depending on the bargaining power between the government and the BSA, ould be hosen to imize the profit of just the firm, to also imizing surplus of legal onsumers. n this setion we have done the analysis for the ase where the BSA hooses to imize the surplus of the firm and the onsumers who buy legally. n the Appendix we also present the results for the ase where the BSA only imizes the surplus of the firm. The BSA imizes this surplus in eah of the four regions and pis the strategy where the imized total surplus is the greatest. Consumer surplus of the onsumers who buy legally from the firm: CS = ( q p d (6 1 Assuming that the BSA bears a ost ( where > 0 for implementing a poliy. The BSA s imization problem is, imize total surplus ( TS i.e. f + CS subjet to the boundary onditions of eah of the four regions. 1 1 if 0 8 (1 ( + 1 if < 4 [9 (1 ] TS = [ ] 1 if 4< 5 ( + 1 if 5< < ( Proposition 3. The optimal poliy hoie, for eah of the four regions are: i = 0,ii 08( ( y 6y iii = where = 4 if < and 4 = if 4 (1+ < < iv ( ( y = ( + ( ( ( + (1 ( + (7

11 11th Paifi-Asia Conferene on nformation Systems i Here denotes the optimal poliy hoie in region i =,,,.nregion ( 0, the profit of the firm and the onsumer surplus don t depend on the poliy hoie. The BSA thus hooses the minimum poliy hoie = 0. n region ( < 4, TS is a dereasing funtion of. Again the BSA hooses the minimum level of poliy hoie in this 08(1. range, =.nregion ( 4 < 5, onsumers who buy from the firm, get zero surplus sine the firm harges a prie equal to quality. The BSA imizes the profit of the firm net its ost to implement the poliy. The profit of the firm is a onave funtion (as seen from Figure 1, while the ost funtion of the BSA is onvex. Thus if a ima exists in 4 this range, it is =. The onstraints for this solution ome from the restritions 4 + ( + that the ima must be in the speified range of the poliy variable. The other solution in region is a orner solution, when the onstraint 5 binds. n region ( 5 < <, onsumer surplus is again zero. The profit funtion of the firm is onave (as seen from 3( y 3 Figure 1, while the ost funtion is onvex. The ima is at = 6y. The i imized TS in eah region an be obtained by substituting in the orresponding TS given in (7. i Denoting the imized TS in region i by TS, the global ima an be obtained by i omparing all four TS. t is a fairly involved algebrai problem to obtain the onditions i under whih eah one of the solutions is the global ima. nstead we evaluate TS for i =,,,, varying the exogenous parameters in the range [0. 001, 10] (inrements 050., in the range [0. 001, 10] (inrements 050., and in the range [0. 34, 0. 99] i (inrements We find that in all ases, either TS or TS dominates the other TS. We plot TS and TS for three different parameter values of (0. 60, 090. and 099., and different values of and (see Figure. When the lielihood that pirated software will be funtional is low ( = 060., then the expeted utility of onsumers from pirating is low. n this ase, TS dominates TS, for all values of and (see Figure a. The BSA will hoose a poliy = 0, i.e., it is non-optimal for the BSA to expend any ost to prevent piray. When the lielihood that the pirated software will be funtional, is medium ( = 090., then for high values of and low values of, TS dominates TS (see Figure b. The BSA hooses a high level of poliy hoie = in this region. Consumers earn zero surplus for this hoie sine the firm does not prie aggressively nowing that the pirate annot tae a big hun of the maret beause of the high. Thus, although the quality of the produt is higher, onsumers are left indifferent between buying and not buying. The onsumers who buy from the firm are atually better off in terms of surplus when the BSA hooses a poliy of = 0. When the lielihood that the pirated software will be funtional is high ( = 099., then the BSA will hoose a high level of poliy = for almost all values of and (see Figure. A poliy hoie = 0 is thus almost never optimal in this ase. Any intermediate level of poliy hoie is non-optimal and for speifi ranges of poliy hoie, an inrease in poliy may hurt innovation and promote piray. For the ase when the BSA imizes the profit of the firm only, we still find that TS or TS i dominates the other TS. Sine these two surpluses are the same as in the ase where the

12 11th Paifi-Asia Conferene on nformation Systems BSA also imizes the profit of the legal onsumers, the rest of the analysis is the same. TS, TS TS, TS TS TS TS TS a = 0.60 b = 0.90 TS, TS TS TS = 0.99 Disussion Figure TS and TS for a = 0.60 b = 0.90 and = 0.99 n this paper our fous was on how innovation (quality is affeted by the poliy hoie of allianes suh as the BSA when piray is prevalent. We onsidered a maret where the firm and the pirate share the demand for the produt, and onsumers differ in their ethial ost to pirate. Our results have the following impliations: mpliations for the software firm: Given that the software firm an observe the poliy hoie by the BSA, and also the quality of its own software, then, when the firm nows it has a superior produt and the poliy hoie by the BSA is low, then it should prie aggressively to mae it unprofitable for the pirate to exist in the maret. Also, when the firm nows it doesn t have a high quality produt, but the BSA has hosen a high poliy hoie, it should not engage in an aggressive priing strategy and leave a small segment of the maret for the pirate

13 11th Paifi-Asia Conferene on nformation Systems mpliations for the BSA: n a monopoly maret, an inrease in the poliy variable (in the form of legal ation against pirating users, or eduating users about the harms of piray, ould at as a disinentive for innovation. This happens beause, in ertain regions, the poliy hoie by the BSA, and the quality hoie by the firm beome strategi substitutes. Thus an inrease in the poliy variable leads to a derease in the quality hoie by the firm. f the lielihood that pirated software will be funtional is low, then it is non-optimal for the BSA to expend any ost to redue piray. When the lielihood that the pirated software will be funtional is medium, then a high level of poliy hoie is optimal, only for high values of tehnology ost, and low values of poliy ost. When the lielihood that the pirated software will be funtional is high, then, the BSA should almost always hoose a high level of poliy hoie. The results however, are subjet to the limitations of the model. One limitation of the model is that, we assume that all onsumers value software equally. One onsequene of this assumption is that we find threshold type priing poliies. Another onsequene of the above assumption is that the maret is always overed. A diretion for future researh ould be to model heterogeneity in valuations. To eep things tratable, one would have to sarifie on heterogeneity in terms of ethial propensity to pirate, sine otherwise the onsumer s type, would be two dimensional. n this paper we don t onsider the protetion strategies by the firm. Future researh ould loo at protetion as a strategi hoie by the firm. We assumed a funtional form for the ethial ost to pirate. Our hoie was motivated by eeping the model tratable, and using a funtional form where the ost inreases with the poliy hoie and inreases more for the onsumer who has a greater propensity not to pirate. The ethial ost funtion ould also be a funtion of prie i.e. the onsumers ould bear a higher ost for pirating more expensive software. Our framewor ould not be extended to this ethial ost funtion beause it leads to orner solutions in the final stage. Future researh ould try out this alternate ethial ost funtion in an alternate framewor. We assumed that the membership fees that the firm pays to the BSA to be zero. Given that the BSA enjoys eonomy of sale in fighting piray, the membership fees would be a very small perentage of the total ost to fight piray. Hene the results would not hange qualitatively by assuming a positive membership fees. Referenes Banerjee, D. S. Software piray: A strategi analysis and poliy instruments, nternational Journal of ndustrial Organization (1, 003, pp Bae, S. H., and Choi, J. P. A Model of Piray, woring paper Mihigan State University, 003. BSA Enforement, BSA, First BSA and DC piray study 006, /006-Global-Piray-Study.fm Chen, Y. N., and Png,.P.L. nformation goods priing and opyright enforement: Welfare analysis, nformation Systems Researh (14:1, 003, pp Conner, K. R., and Rumelt, R. P. Software piray: An analysis of software protetion strategies, Management Siene (37:, 1991, pp Gopal, R.D., and Sanders, G.L., Preventive and deterrent ontrols for software piray, Journal of Management nformation Systems (13:4, 1997, pp Gopal, R. D., and Sanders, G. L. nternational software piray: Analysis of ey issues and impats, nformation Systems Researh (9:4, 1998, pp Gross, G. s software piray stealing jobs, PC World, Aug. 003,

14 11th Paifi-Asia Conferene on nformation Systems /news/artile/0,aid,110113,00.asp. Novos,. E., and Waldman, M. The effet of inreased opyright protetion: An analytial approah, Journal of Politial Eonomy (9:, 1984, pp Wood, C. The impat of ounterfeit software, PC Magazine, Ot. 001, Shy, O., and Thisse, J. F. A strategi approah to software protetion, Journal of Eonomis and Management Strategy (8:, 1999, pp wata, E. Software piray taes toll on global sale, USA Today, Aug. 001,