Piracy and Innovation: Does Piracy Restore Competition?

One of the main issues usually associated with piracy is that it hinders innovation. As this leads to smaller profits, firms have no incentive to innovate. In this article, we show that even if piracy is usually seen as innovation “killer” it may, on the contrary, increase innovation: piracy places firms in a highly competitive environment and pushes them to innovate continuously in order to maintain their market power. We then evaluate the benefits of this innovation, stating that even if innovation is indeed encouraged, the type and level of innovation may be suboptimal. This leads to the discussion of different policies aiming at solving the piracy problem. We show that, even though reinforcing IPRs is usually seen as the best way to solve this problem, increasing the level of IPR protection may not be the best solution. Indeed we show that high level of IPR protection creates additional market distortions, and consequently an additional loss of welfare. Finally, we introduce two type of policies aiming at producing efficient level of innovations: a system of tax/subsidy, and, surprisingly enough, perfect competition.