Software piracy: a strategic analysis and policy instruments

We examine the government's role in restricting commercial piracy in a software market. Welfare maximization may or may not result in monitoring as the socially optimal outcome. Correspondingly, either monopoly situation or market sharing between an original firm and a pirate are subgame perfect equilibria. If it is profitable for a monopolist to prevent piracy by installing a protective device, then not monitoring is the equilibrium. We also discuss the effects of network externalities, in addition to deriving the effects of changes in the reliability of the pirated software and network benefits on the policy variables, the extent of piracy, and the monopolist's incentive to prevent piracy. (C) 2003 Elsevier Science B.V. All rights reserved.