How Does Public IPR Protection Affect its Private Counterpart? Copyright and the Firms Own IPR Protection in a Software Duopoly

Size: px

Start display at page:

Download "How Does Public IPR Protection Affect its Private Counterpart? Copyright and the Firms Own IPR Protection in a Software Duopoly"

Alexandrina Andra Andrews
7 years ago
Views:

1 KREŠIMIR ŽIGIĆ, JIŘÍ STŘELICKÝ, MICHAEL KÚNIN How Does Public IPR Protection Affect its Private Counterpart? Copyright and the Firms Own IPR Protection in a Software Duopoly CERGE-EI, Prague

2 FOCUS How the strength of public IPR protection (copyright protection) affect the pricing and private IPR protection strategies of software developers? When the two forms of IPR protection (public and private) are complements to each other, when are they substitutes and when a change in public IPR has no impact on private IPR protection?

When the two forms of IPR protection (public and private) are complements to each

3 OUTLINE Motivation Assumptions Model Case 1 Case 2 Conclusion

5 MOTIVATION Software piracy mostly studied within the monopoly setup Rationale: "...digital products within a given category are highly differentiated in the eyes of consumers... (see Belleflamme and Peitz, p.4). Realistic description of the software market might be also captured by competition among software developers. Typically there is a software product that is perceived as superior and priced much higher than its closest substitutes. E.g. market for vector graphic editing software: Adobe Illustrator vs and CorelDRAW

Realistic description of the software market might be also captured by competition among software developers.

6 ASSUMPTIONS The public IPR protection (copyright protection) is broad-based: it raises the piracy costs equally for all consumers. The developers private protection is in the form of costly physical product protection (related to Digital Rights Management System). Developers incur efforts and costs to reduce the fraction of skillful consumers able to illegally use the software. They cannot fully eliminate illegal usage.

The developers private protection is in the form of costly physical product protection (related to

7 THE MODEL Industry set-up Developers A and B compete in prices on a particular market and offer product varieties of different quality (qa > qb) Vertical product differentiation: consumers prefer software A over software B if offered at the same price Both developers A and B already exist with established quality levels of their respective varieties Segmented market hypothesis => a particular software market, which is not interrelated with the other markets on which developers may operate

same price Both developers A and B already exist with established quality levels of their respective varieties Segmented

8 THE MODEL Developers problem A developer implements protection at level c i [0,1]. For each user the probability to be able to use the illegal version is (1- c i ), and the probability to be only able to use the legal version is c i. The game: 1. Developers choose the level of private protection, c i where i=a,b 2. There is price competition (marginal costs constant and normalized to 0) The costs of implementing protection: c i ); c i )>0 for c>0; c i )>0; 0 0)=0; 1 Net profit function: Π i = π i(c i ) c i )

legal version is c i. The game: 1. Developers choose the level of private protection, c i where i=a,b 2.

9 THE MODEL The regulator s role Monitoring software usage and to the penalization of those users, who use products illegally and are disclosed Expected penalty for using an illegal software version, X. It also captures the strength of the copyright protection. The public protection is captured by the parameter X, while the resulting optimal private protection is denoted as c(x).

software version, X. It also captures the strength of the copyright protection.

11 THE MODEL The Level of Public IPR protection 1) High: None of the developers implement protection. 2) Medium: Developer A implements protection while developer B does not. 3) Low: Both developers implement protections.

2) Medium: Developer A implements protection while

12 Case 1: Medium Public IPR Protection Only developer A implements protection c subcase 1 demand functions: there are some users who have illegal access to product A but still want to buy product B

13 Case 1: Medium Public IPR Protection Only developer A implements protection c subcase 2 Demand functions (identical to the pure Bertrand equilibrium)

14 Case 1: Medium Public IPR Protection Only developer A implements protection c Subcase 1: p * A > X and p * B X There are some users who have illegal access to product A but still want to buy product B. This case occurs if X is "large enough" (in the sense that X p * B ). Developer B competes for the consumers that have illegal access to software A (so called "non-controlled" consumers) by aggressively charging a low price The piracy, no "full dependence" equilibrium since developer B does not fully depend on the A's protection.

This case occurs if X is "large enough" (in the sense that X p * B ).

16 Case 1: Medium Public IPR Protection Only developer A implements protection c The corner "full dependence" equilibrium p * A > X and p * B = X All consumers not controlled by developer A use illegal product (or nothing).

equilibrium p * A > X and p * B = X All consumers not

18 Case 1: Medium Public IPR Protection Only developer A implements protection c Effects of X on profits and prices in the two equilibrium setup No "full dependence" equilibrium: The effect of X is positive on Π * A(X) but the respective effects on π * B(X) and both prices are a priori unclear. The corner "full dependence" equilibrium: the effect of X is positive on both Π * A(X) and on π * B(X) as well as on both prices.

A(X) but the respective effects on π * B(X) and both prices are a priori unclear.

19 Case 2: Low Public IPR Protection Both developers implement protection

20 Case 2: Both developers implement protection Demand functions: Equilibrium prices:

22 CONCLUSION The "low X" equilibrium structure: both equilibrium prices are above X, so both developers implement private protection, that is, A 0while B 0. The three "medium X" equilibrium structures: only the high-quality good equilibrium price is above X, so only the high-quality developer implements private protection. Depending on the ensuing market structure it is possible that, negative or zero. is positive, The two "high X" equilibrium structures, when both equilibrium prices are not above X, so no protection is needed, that is, = 0.

23 CONCLUSION if X is zero or small then both developers introduce protection and increase in the strength of the copyright protection enables both developers to raise prices and earn larger profits (strategic complements) If X is intermediate, only developer A introduces IPR protection: Fat cat strategy: An increase in X makes the fat cat strategy stronger for "lower" values of X (the corner full dependence equilibrium) while it likely makes it weaker for larger X (the piracy no full dependence equilibrium). When X is equal or exceeds a pure duopoly price of a software A, there is no need for protection by any developers.

24 Thank you for your attention!

Software Anti-piracy and Pricing in a Competitive Environment: a Game Theoretic Analysis

Software Anti-piracy and Pricing in a Competitive Environment: a Game Theoretic Analysis We study a problem of two software firms competing on price in a market where consumers can choose between purchasing