Complementary digital products and digital piracy

Abstract

Digital piracy is a worldwide, highly pervasive phenomenon across countries and sectors, with social costs estimated in billions USD. This phenomenon mainly takes the form of End-User digital piracy. In End-User piracy a single consumer illegally consumes a good without paying the due price to the Copyright Owner. The industries that suffer the most from End-User piracy are those based on Information Goods, such as the motion pictures industry, the music industry, book publishing and the software industry. To counteract the effects of Digital Piracy firms have come up with various strategies, one of which is the use of complementary products to allow for indirect appropriation. Numerous companies base their business model on the creation of franchises which complete and enhance the consumption experience offered by the Information Good. In this work we present a general model for vertical differentiation and digital piracy à la Mussa and Rosen (1978) where a monopolist offers an Information Good in a digital market affected by end-user digital piracy together with a complementary good, thus analyzing and uncovering some of the underlying mechanics of this type of markets.