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

The impact of global piracy on the US software industry has largely been understood through analysis of data from Business Software Alliance, a trade group representing the world's largest software makers. While the impact of cultural and legal factors on global piracy has been individually examined by prior research, we present a theory-based structural two-stage piracy model that not only includes these extant covariates but also the role of uniform global pricing hitherto adopted by most domestic software firms. Through an empirical analysis of piracy data from 1994-2002 covering all major continents, we compare our structural model of two-stage piracy that separates preventive factors (first stage) from deterring ones (second stage), with extant reduced-form OLS estimates. Several interesting findings result; first, we demonstrate that the two-stage utility-theory based model (which suggests that some consumers buy outright while some others first pirate and turn buyers) is superior to single-stage or other reduced-form models in explaining piracy. Second, we observe that the relative impact of moral and legal costs on prevention and deterrence are distinctly different warranting a closer look at pricing. Third, we do observe a distinct increase in the baseline utility and value for software post-piracy suggesting externality benefits. And finally we observe that price discounts may play a bigger role in deterring piracy (in the second stage) but may not play a significant role in preventing people from engaging in this activity. We then suggest that software firms should eschew global pricing and derive an optimal pricing menu for current country-specific conditions while underscoring the importance of enforcement actions in mitigating piracy.