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Moderate Amounts of Online Piracy may actually be good for Manufacturers and Retailers?

Posted January 29, 2019

Not to condone online piracy, a group of researchers from Indiana University‘s Kelley School of Business had recently found that a moderate level of piracy can actually have positive impact on the bottom line of both manufacturers and retailers.

“When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer while, at the same time, enhancing consumer welfare,” wrote the authors in their paper.

Primarily, this happens through the effects of piracy reducing, or in some cases even completely eliminating, the adverse effects of double marginalisation – an economic phenomenon where the market price of a product is increased through mark-ups instituted by both manufacturers and retailers.

Online piracy, if held in check, might actually be beneficial, study suggests. Image credit: S. Brickman, CC BY-SA 2.0.

“From the manufacturer’s point of view, the retailer getting squeezed is a good thing,” explained Assistant Professor of Operation and Decision Technologies Antino Kim. “It can’t mark-up the product as before, and the issue of double marginalization diminishes. Vice versa, if the manufacturer gets squeezed, the retailer is better off”.

As results of the study, published in the latest issue of the journal MIS Quarterly, have shown, when both manufacturers and retailers are ‘squeezed’ at the same time, the price of the goods in question tend to approach a more optimal price that a single, vertically integrated entity would charge.

While slack regulation and rampant piracy have been found to be detrimental to all – perhaps even to pirates themselves due to downstream effects – costly lobbying for, and implementation of, stricter anti-piracy laws might not be the best approach.

So, while this does not mean that regulators should all of a sudden abandon their efforts, it does suggest that “situated in a real-world context, our manufacturer and retailer should recognize that a certain level of piracy or its threat might actually be beneficial and should, therefore, exercise some moderation in their anti-piracy efforts”.

In summary, the authors suggest manufacturers and retailers follow the TV network HBO, whose über-poplar series “Game of Thrones” was subject to millions of illegal downloads, and simply turn a blind eye to piracy… to a certain level.


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