Regulating Digital Piracy Consumption

Abstract

Regulators across the globe have imposed penalties on consumers for digital piracy consumption. Contrary to expectations, however, digital piracy consumption has continued to grow. The authors develop a simple model of competition between a copyright holder and a pirate firm to offer a plausible account for this observation as well as actionable guidelines for optimal regulation design. The core of this idea is to endogenize the pirate firm's strategic investment in antitracking technologies that help consumers evade a regulator's penalty. The authors find that as the penalty rises, piracy consumption can surprisingly increase after decreasing first; relatedly, the copyright holder and the society may suffer from tighter regulation. Depending on the cost of antitracking technologies of the pirate firm, the regulator optimally sets the penalty to operate in two different regimes. When the technology is available at a low cost, the regulator can achieve the goals of maximizing social welfare and minimizing piracy consumption simultaneously by setting a moderate penalty that maximizes consumers’ expected penalty and tolerates some level of piracy consumption. In contrast, when the technology is costly, the regulator should set a relatively high penalty to completely impede piracy supply. Additionally, the authors show that supply-side regulation does not substitute away demand-side regulation, and educating consumers about copyright protection may unintentionally lead to an increase in piracy consumption. Last, the authors identify complex nonmonotonic long-run effects of piracy consumption regulation on the copyright holder's incentives for content creation and copyright protection.