Authors: Vibhanshu Abhishek, Rahul Telang, and Yi Zhang
Abstract: Advances in technology have enabled producers of entertainment goods to reach customers in innovative ways. However, new technologies also make it easier for users to infringe on the content. Producers argue that piracy hurts their ability to innovate, while critics argue that piracy acts as a leveler and encourages consumer friendly innovation. In this paper, we explore the interplay of piracy and technology adoption based on a dynamic model. In this model, the firm always releases a physical product initially and has to make a decision on whether and when to adopt the newer digital platform to facilitate digital release. New platform can help the producer target broader customer base, but can be costly and might lead to higher piracy. We show that, when the cost for innovation adoption is small, the piracy in the existing channel has no effect on the timing of technology adoption. However, when this cost is sufficiently high, piracy in the existing channel will act as a competing force and lead to an earlier adoption of digital channel if a large number of users are willing to move to the legal version at a full price. If not, piracy discourages and delays adoption. In addition, the piracy caused by new channel adoption can lead the monopolist to delays release. Thus, only under specific conditions, does piracy create incentives to adopt innovations. Otherwise, it deters adoption. On the welfare side, we find that while some level of piracy is beneficial to consumers, higher level of piracy delays adoption of the digital platform, hurting overall consumer welfare. Furthermore, our model provides specific empirically measurable conditions that could be used to identify whether piracy is acting as a productive or a damaging role on technology adoption.
Citation: Abhishek, Vibhanshu and Telang, Rahul and Zhang, Yi, Effect of Piracy on Adoption of Technological Innovation (September 17, 2014). Available at SSRN: http://ssrn.com/abstract=2497691
