Software Piracy: An Empirical Examination of the Impact of Network Externalities and Open Source Alternatives on Willingness to Pay

Software piracy continues to threaten the profitability of the software development industry. Software publishers have employed both preventive and deterrent controls and made small gains in protecting intellectual property rights. Although deterrent measures are believed to have a positive affect on profits, preventive controls are reported to have a negative affect as the cost of engagement offsets company profits. Commercial software developers are aggressively seeking economical methods of control to prevent piracy through extensive licensing agreements, further elimination of physical distribution networks, and the use of encryption-based software protection systems. However, recent encryption-based efforts have received negative responses from consumers. With the tightening of controls, more users are turning to other alternatives, posing a secondary threat to company profits. In this paper we study the impact of network externalities and the availability of open source software on the commercial software market when extensive piracy controls are in place. We use experimental closed-end contingent valuation to explore how the value of commercial software is impacted by piracy controls and competing software availability. In the complete design, we conduct a 2x2x2 experiment and use survey methods to elicit consumer preferences in determining how much students would be willing to pay (WTP) for commercial software under the following conditions: 1) high and low levels of network externalities, 2) the absence or presence of piracy controls, and 3) when comparable open source software is available. Preliminary results to pretest the survey instrument and experiment are included in this paper.