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We analyse how piracy affects the choice of quality of a monopolist producing a digital good. A digital good is a special kind of information good, for example a music CD, a DVD or an electronic magazine available online. An important feature of digital goods is that they can be copied without a decline in the copy's quality. We define piracy as both the production and the sale of illegal copies and the practice of file sharing through the Internet. Recently, the introduction of fast Internet connections and peer-to-peer technologies (like Napster and Gnutella) has caused a huge increase in the copies and firms are adopting various measures to counteract this phenomenon. In this paper we focus on a firm's incentive to vertically differentiate the quality of its products in the presence of piracy. We show that without piracy and in the absence of production costs the monopolist never differentiates its product. With piracy, the monopolist might introduce a second, lower-quality good in order to induce consumers who acquire a pirated copy to buy the original. Hence differentiation may arise in equilibrium. This type of vertical differentiation is relatively widespread in the software market (consider the practice of distributing versions of a software with less features) and also in the music market (for example, selling music online). We consider a model of vertical differentiation where consumers differ in two aspects. They have both different will-ingness to pay for quality and different costs of accessing a pirated copy. Moreover, those with a greater cost of pirating also have a higher willingness to pay for quality. In this framework we show that the monopolist has two different strategies. On the one hand it can produce just one quality and sell it only to consumers with a high willingness to pay whereas those with low willingness to pay for quality obtain a pirated copy. On the other hand, the monopolist can produce two different qualities, pricing them so that consumers with high willingness to pay buy both whereas those with low willingness to pay either buy the low quality or acquire a pirated copy. The introduction of protection devices that prevent copying or the enforcement of copyright laws increases quality levels, prices and therefore profits. Given that the monopolist sets a higher price for the low quality, the most interesting aspect of protection is to render differentiation more attractive, so that the main impact of protection is on product differentiation rather than on the extent of illegal demand.

An integrated monopoly, where all complements forming a composite good are offered by a single firm, is typically welfare superior to a complementary monopoly. This is the tragedy of the anticommons. We consider the possibility of competition in the market for each complement. We present a model with two perfect complements and introduce imperfect substitutes for one and then for both complements. We prove that, if one complementary good is produced by a monopolist, and if competition for the other complement does not vary the average quality in the market, then an integrated monopoly is still superior. In such case, favoring competition in some sectors, leaving monopolies in others would be detrimental for consumers and producers alike. Competition may be preferred if and only if the substitutes of the complementary good differ in their quality, so that as their number increases, average quality and/or quality variance increases. Results change when competition is introduced in each sector. In this case, if goods are close substitutes, we find that competition may be welfare superior for a relatively small number of competing firms in each sector, even with no quality differentiation.

The presence of multiple sellers in the provision of (non-substitutable) complementary goods leads to outcomes that are worse than those generated by an integrated monopoly, a problem also known as “tragedy of the anticommons”. In this paper we identify some conditions under which the tragedy is solved and a complementary oligopoly is preferable to a multiproduct monopoly. First, we introduce several substitutes for each complement and determine their minimum number for the result to hold. Second, we study asymmetric complementarity and the presence of essential goods, stressing the role of the degree of differentiation across substitutes for the persistence of the “double mark-up” problem. Third, we verify whether the inefficiency result holds in dynamic terms, discussing the adoption of new technological standards in complementary oligopolies. The focus will be on indirect network externalities, checking under which conditions an inefficient standard emerges or the market becomes “locked-in” in an old standard.

I provide a full characterization of the quality choice in duopolies with vertical differentiation, without assuming ex-ante if the market is fully covered or not. This will allow to show that covered or uncovered market configurations are endogenous outcomes of firms’ strategic interaction. To this purpose, I assume that firms are characterized by quadratic fixed costs of quality improvements and check whether pure-strategy subgame perfect equilibria with a corner solution always exist. Finally, my results are compared to the quality choice that maximizes the total surplus of the economy. I show that the welfaremaximizing choice of qualities does not have to be found in the same market configuration of the corresponding market equilibrium.

In this paper we analyze the effects of the introduction (by either firms or authorities) of a composite good consisting of a fixed proportion of two imperfectly substitutable stand-alone products. First, we find that such a “cocktail” rises the Bertrand equilibrium prices as it introduces a certain degree of complementarity. It also creates incentives to price discriminate and products can be sold at a discount or at a premium (depending on their degree of substitutability) when they are used as part of the composite good. We consider two distinct forms of price discrimination: a traditional one, in which producers set their prices independently of each other and a coordinated one, in which producers cooperate (collude) when setting the price of the composite good. Composite goods might have either a positive or a negative impact on consumer surplus. The sign of the impact depends on the form of price discrimination and consumers tend to be better off if producers coordinate. The impact is also more likely to be positive if “cocktails are done right”, i.e., if their quality is high compared to the quality of the stand-alone products. © 2020, Springer-Verlag GmbH Austria, part of Springer Nature.