Can piracy lead to higher prices in the music and motion picture industries?

Piracy of copyrighted goods has received increased attention in the literature. Much of this research has focused on pricing policies, protection against piracy, and governmental policies in the software industries. In this paper, we focus on pricing policies of producers in the music and motion picture industries. Exact analytical results are difficult to obtain; therefore, we develop an approximating function of the cumulative demand. This enables us to obtain closed–form expressions for the optimal price. Our results show that the existence of piracy in these industries and the lack of positive network externalities may cause monopolists to charge higher prices to optimize profits. These prices increase with increases in the speed of piracy and longer product lifecycles. We demonstrate the accuracy of our demand approximation function using a numerical experiment. We show how a two–price strategy and dual distribution channels may help in reducing the negative effects of piracy. We perform some numerical sensitivity analysis and provide managerial insights.