Pricing Strategies and Protection of Digital Products Under Presence of Piracy: A Welfare Analysis

Based on a duopolistic set-up where firms produce software products with respective support packs, we analyze firms' pricing and predetermined monitoring decisions, as well as the impacts of these factors on welfare. In the presence of end-user piracy, users are classified as support-dependent and support-independent. First, a theoretical model is derived, but, due to its complexity, a numerical example is employed to derive the results. We observe that firms that are in competition face a menu of monitoring and pricing combinations. Our results indicate that (i) firms may use monitoring and pricing as strategic complements, rather than substitutes, (ii) profits are not necessarily an increasing function of both monitoring rates and prices, and welfare improvement from the lowest set of monitoring and pricing levels is possible, (iii) firms may prefer improvement in software rather than support packs, targeting especially the support-independent users.