Peer-to-peer Networks and Complementary Goods: The Impact of Openness and Innovation on Profitable Piracy
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Abstract
File-sharing is often depicted as detrimental to traditional commercial activities and tends to dissuade official digital goods’ producers from innovating. Meanwhile, evidence shows that producers are likely to provide complementary hardware goods that are compatible with digital goods available both offline and online. This article investigates to what extent the introduction of peer-to-peer networks has a positive impact on the level of profits reached by producers.
Our model shows that the file-sharing activity does not crowd the official digital goods producers and hardware goods producers out of the market. Moreover, we find that there exists suitable quality-based strategies so that both types of producers benefit from the file-sharing activity. The utility that peer-to-peer networks provide to file-sharers has to be considered cautiously for commercial firms to gain positive outcomes from the file-sharing activity.
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References
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Peitz, M. and P. Waelbroeck (2006a) “Piracy of digital products: a critical review of the theoretical literature”, Information Economics and Policy, 18(4): 449–476.
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Poddar, S. (2005) “Network externality and commercial software piracy”, working paper, National University of Singapore, Singapore, Singapore.
Rochelandet, F. and F. Le Guel (2005) “P2P music-sharing networks: why legal fight against copiers may be inefficient?”, Review of Economic Research on Copyright Issues, 2(2): 69–82.
Shah, S. (2006) “Motivation, governance, and the viability of hybrid forms in open source software development”, Management Science, 52(7): 1000–1014.
Shapiro C. and H. R. Varian (1998) Information Rules: A Strategic Guide to the Network Economy, Cambridge, MA: Harvard Business School Press.
Shy, O. (1996) Industrial Organization: Theory and Applications, Cambridge, MA: The MIT Press.
Shy, O. (2001) The Economics of Network Industries, New York, NY: Cambridge University Press.
Shy, O. and J. F. Thisse (1999) “A strategic approach to software protection”, Journal of Economics and Management Strategy, 8(2): 163–190.
Takeyama, L. N. (1994) “The welfare implications of unauthorized reproduction of intellectual property in the presence of network externalities”, Journal of Industrial Economics, 42(2): 155–166.
Toffler, A. (1980) The Third Wave, New York, NY: William Morrow and Co..
von Hippel, E. (1988) The Sources of Innovation, New York, NY: Oxford University Press.
von Hippel, E. (2005) Democratizing Innovation, Cambridge, MA: The MIT Press.
Zentner, A. (2006) “Measuring the effect of music downloads on music purchases”, Journal of Law and Economics, 49(1): 63–90.
Bakos, Y. (2001) “The emerging landscape for retail e-commerce”, Journal of Economic Perspectives, 15(1): 69–80.
Besen, S. M. and S. N. Kirby (1989). “Private copying, appropriability, and optimal copying royalties”, Journal of Law and Economics, 32(2): 255–280.
Bonaccorsi, A., Giannangeli, S. and C. Rossi (2006). “Entry strategies under competing standards: hybrid business models in the open source software industry”, Management Science, 52(7): 1085–1098.
Bounie, D., Bourreau, M. and P. Waelbroeck (2005) “Pirates or explorers? Analysis of music consumption in french graduate schools”, working paper EC-05-01, ENST Paris, Paris, France.
Bourreau, M. and P. Labarthe-Piol (2004) “Le peer-to-peer et la crise de l’industrie du disque : une perspective historique”, Réseaux, 125: 17–54.
Brynjolfsson, E. and M. Smith (2000) “Frictionless commerce? A comparison of internet and conventional retailers”, Management Science, 46(4): 563–585.
Conner, K. R. and R. P. Rumelt (1991) “Software piracy – An analysis of protection strategies”, Management Science, 37 (2): 125–139.
Cunningham, B. M., Alexander, P. J. and N. Adilov (2004). “Peer-to-peer file sharing communities”, Information Economics and Policy, 16(2): 197–213.
Curien, N., and F. Moreau (2004) “The introduction of electronic commerce with product differentiation: when local monopolists go online”, Conservatoire National des Arts et Métiers working paper, CNAM, Paris, France.
Dahlander, J. and M. G. Magnusson (2005) “Relationships between open source software companies and communities: observations from nordic firms”, Research Policy, 34(4): 481–493.
Domon, K. and N. Yamazaki (2004) “Unauthorized file-sharing and the pricing of digital content”, Economic Letters, 85(2): 179–184.
Flowers, S. (2008) “Harnessing the hackers: the emergence and exploitation of outlaw innovation”, Research Policy, 37(2): 177–193.
Gayer, A. and O. Shy (2003a) “Internet and peer-to-peer distributions in markets for digital products”, Economic Letters, 81(2): 51–57.
Gayer, A. and O. Shy (2003b) “Copyright protection and hardware protection”, Information Economics and Policy, 15(4): 467–483.
Gayer, A. and O. Shy (2006) “Publishers, artists, and copyright enforcement”, Information Economics and Policy, 18(4): 374–384.
Gopal, R. D., Bhattacharjee, S. and G. L. Sanders (2006). “Do artists benefit from online music sharing”, Journal of Business, 79(4): 1503–1534.
Gopal, R. D., Sanders, G. L., Bhattacharjee, S., Agrawal, M. and S. C. Wagner (2004) “A behavioral model of digital music piracy”, Journal of Organizational Computing and Electronic Commerce, 14(2): 89–105.
King, P. S., and R. Lampe (2003) “Network externalities, price discrimination and profitable piracy”, Information Economics and Policy, 15(3): 271–290.
Krishnan, R., Smith, M. D., Tang, Z. and R. Telang (2004) “An empirical analysis of network externalities in peer-to-peer music sharing networks”, Information Systems Research, 15(2): 155–174.
Krishnan, R., Smith, M. D., Tang, Z. and R. Telang (2007) “Digital business models for peer-to-peer networks: Analysis and economic issue”, Review of Network Economics, 6(2): 194–213.
Krishnan, R., Smith, M. D. and R. Telang (2003) “The economics of peer-to-peer networks”, Journal of Information Technology Theory and Applications, 5(3): 31–44.
Liebowitz, S. J. (1985) “Copying and indirect appropriability: photocopying of journals”, Journal of Political Economy, 93(5): 945–957.
Liebowitz, S. J. (2005) “Pitfalls in measuring the impact of file-sharing”, CESifo Economic Studies, 51(2-3): 435– 473.
Liebowitz, S. J. (2006) “File-sharing: creative destruction or just plain destruction?”, Journal of Law and Economics, 49(1): 1–28.
Oberholzer, F. and K. Strumpf (2004) “The effect of file sharing on record sales: an empirical analysis”, working paper, University of North Carolina, Chapel Hill, NC.
Peitz, M. and P. Waelbroeck (2004) “The effect of internet piracy on music sales: cross-section evidence”, Review of Economic Research on Copyright Issues, 1(2): 71–79.
Peitz, M. and P. Waelbroeck (2005) “An economist’s guide to digital music”, CESifo Economic Studies, 51(2-3): 363–432.
Peitz, M. and P. Waelbroeck (2006a) “Piracy of digital products: a critical review of the theoretical literature”, Information Economics and Policy, 18(4): 449–476.
Peitz, M. and P. Waelbroeck (2006b) “Why the music industry may gain from free downloading – The role of sampling”, International Journal of Industrial Organization, 24(5), 907–913.
Poddar, S. (2005) “Network externality and commercial software piracy”, working paper, National University of Singapore, Singapore, Singapore.
Rochelandet, F. and F. Le Guel (2005) “P2P music-sharing networks: why legal fight against copiers may be inefficient?”, Review of Economic Research on Copyright Issues, 2(2): 69–82.
Shah, S. (2006) “Motivation, governance, and the viability of hybrid forms in open source software development”, Management Science, 52(7): 1000–1014.
Shapiro C. and H. R. Varian (1998) Information Rules: A Strategic Guide to the Network Economy, Cambridge, MA: Harvard Business School Press.
Shy, O. (1996) Industrial Organization: Theory and Applications, Cambridge, MA: The MIT Press.
Shy, O. (2001) The Economics of Network Industries, New York, NY: Cambridge University Press.
Shy, O. and J. F. Thisse (1999) “A strategic approach to software protection”, Journal of Economics and Management Strategy, 8(2): 163–190.
Takeyama, L. N. (1994) “The welfare implications of unauthorized reproduction of intellectual property in the presence of network externalities”, Journal of Industrial Economics, 42(2): 155–166.
Toffler, A. (1980) The Third Wave, New York, NY: William Morrow and Co..
von Hippel, E. (1988) The Sources of Innovation, New York, NY: Oxford University Press.
von Hippel, E. (2005) Democratizing Innovation, Cambridge, MA: The MIT Press.
Zentner, A. (2006) “Measuring the effect of music downloads on music purchases”, Journal of Law and Economics, 49(1): 63–90.