Fighting Fire with Fire: Commercial Piracy and the Role of File Sharing on Copyright Protection Policy for Digital Goods

In recent years, with the emergence and growth of illegal file sharing on the Internet, individual piracy of digital goods, i.e., consumers making illegal copies on their own rather than relying on purchasing copies from commercial pirates, has stirred substantial controversy. Threatened by this growth, the information goods industry took legal action by suing the file sharing peer‐to‐peer networks and the consumers who illegally share copyrighted material on these networks. In this paper we demonstrate that each one of these two actions aimed to fight individual piracy can backfire by providing strategic disadvantage to legal publishers of information goods. In particular, we show that in the presence of commercial piracy (i) a higher population of consumers who are capable of individual piracy can increase a legal publisher's profits; and (ii) a higher detection and prosecution rate for individual piracy can reduce a legal publisher's profits. Both effects can be observed in markets where commercial piracy is suppressed because the legal publisher can be coerced to take a price cut to minimize the loss of market share. The latter effect can also be observed in markets with active commercial piracy presence because the legal publisher can be forced to raise prices and concede market share to piracy. Our results suggest that information goods producers may be better off by considering their copyright protection policies concerning individual piracy from a more strategic point of view.