Software piracy in the presence of open source alternatives

Fernando S. Machado, Preethika Sainam, Raghu Santanam, Rajiv Sinha

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We develop a model to investigate the manner in which the pricing, profitability, and protection strategies of a seller of a proprietary digital good respond to changing market conditions. Specifically, we investigate how product piracy and the presence of open source software alternatives (such as Open Office) impact the optimal strategy of a seller of proprietary software (such as Microsoft Office). In contrast to previous literature, we show that firms may make more (rather than less) effort to control piracy when network externalities are strong. In addition, we show that the level of network externalities amplifies losses incurred by an incumbent due to high-quality pirated goods. Therefore, for products characterized by high network externalities (such as software), sellers need to try to maintain a large perceived quality gap between their product and illegal copies. Further, we demonstrate that the appearance of an OSS alternative leads the incumbent to reduce both price and the level of piracy control. Although high-quality pirated goods are detrimental to profits in the absence of OSS, they may actually limit the incumbent’s losses and the need to adjust price and protection strategies due to the introduction of an OSS alternative. Thus, an incumbent may find it easier to compete with OSS in the presence of product piracy. Finally, highly correlated intrinsic valuation between an incumbent and OSS products require smaller adjustments to price and piracy controls and leads to muted impact on incumbent profit.

Original languageEnglish (US)
Pages (from-to)1-21
Number of pages21
JournalJournal of the Association for Information Systems
Volume18
Issue number1
DOIs
StatePublished - Jan 1 2017

Keywords

  • Microsoft
  • Network externalities
  • Open source
  • Piracy protection
  • Software piracy

ASJC Scopus subject areas

  • Information Systems
  • Computer Science Applications

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