An Empirical Examination of Global Software Piracy: Implications for Segmented Pricing and Public Policy

Goizueta Business School, Emory University, Atlanta GA 30322 Abstract Our research reconciles analytical and empirical approaches to piracy and through a panel of 53 countries over a period of 11 years, we empirically show that piracy is indeed a two-stage behavior as suggested by extant analytical models. Global piracy has two non-monetary cost components; moral costs that are representative of ethical propensities to pirate and legal costs that represent consumers’ fear of getting caught and the punitive damage in that event. Our results validate the argument that piracy is not a price-dependent decision alone and it further delineates the differential impact of legal and moral factors on piracy. Interestingly, we find that while moral costs are significant in preventing a consumer from pirating, legal costs affect piracy in two ways. First, they prevent a portion of the market from choosing the piracy route, and second, to a larger extent they deter some of the pirates from holding on to the pirated copy thus incentivizing some to buy during the second stage. We also observe that buyers in the second stage have higher product valuation than pirates lending some support to the potential externality benefits of piracy. However, contrary to some popular arguments that piracy necessarily leads to future sales, the overall beneficial effects of software piracy while indeed present, are quite limited across the industry. We conclude our research with pricing and policy implications; first we demonstrate the superiority of adopting discriminatory country-specific pricing as a function of the prevailing moral and legal costs. Second, we underscore the importance of enforcement actions such as law-suits in mitigating piracy and conclude that a focus on deterrence is superior to prevention strategies.