Optimal Pricing Strategy For Information Goods In The Presence Of Piracy

In recent years,advanced information technology makes information goods piracy increasingly serious.Due to the low marginal cost of information goods,pirated information goods can be produced easily,especially music,software,e-books and similar products.Therefore,this paper has great economic and social significance because it can help managers to make rational decisions and strategically respond to different market conditions in the presence of piracy.From the perspective of enterprise managers,this paper establishes a mathematical model to describe and try to solve the firm’s optimal strategy and the optimal pricing strategy of information goods in the presence of piracy.The specific research contents are as follows:Firstly,we develop an economic theoretical model based on consumer heterogeneity in cost sensitivity to explore under what conditions a monopoly should implement a DRM policy to combat piracy.We conclude that when a firm can adopt DRM restrictions,which have same impact on legal users’ implementation costs and piracy technical costs,adopting DRM restrictions is profitable to the firm when the level of the DRM restrictions is moderate.In this moderate range,the optimal profit increases with the level of the DRM restrictions.Conversely,when the impacts of adopting DRM restrictions on implementation costs and piracy technical costs are different,implementing a DRM policy dominates when this difference is moderate.Furthermore,the optimal profit decreases within a moderate range.Secondly,optimal freemium strategy for information goods in the presence of piracy is studied.We employ a two-stage consumer perception adjustment model to examine the optimal pricing and the feasibility of freemium strategy.Our results show that a higher piracy enforcement level may hurt the firm if consumers’ perception increment about the quality of the premium version is higher than the quality perception increment of the pirated version.This indicates that the presence of a pirated version is not always harmful for the firm.We also find that when consumers’ perception increment about the quality of the premium version is lower than the quality perception increment of the free version,the traditional strategy(i.e.,not offering a free version)weakly dominates the freemium strategy.In contrast,when consumers derive a higher quality perception increment from the premium version,the optimal strategy depends on the piracy enforcement level and the change in consumer quality perception.If the piracy enforcement level is high,the freemium strategy dominates the traditional strategy when consumers’ quality perception increment of the premium version is higher than a given threshold.However,for a low piracy enforcement level,the traditional strategy dominates when consumers derive a higher quality perception and a lower quality perception increment from the pirated version than from the free version.Finally,optimal software upgrade strategy in the presence of piracy is studied.It explores the optimal software upgrade strategy in the presence of piracy.When a firm introduces an upgrade,it can adopt freemium strategy(i.e.,offer free products and paid services)or traditional strategy(i.e.,continue to sell products).We develop a two-period joint model of upgrading and piracy and use it to compare these two strategies.Our model analyses the competition between original products and improved versions.Additionally,there are ethical consumers who are not price sensitive and unethical consumers who are usually price sensitive.We find that whether a firm should adopt copyright protection depends on the reservation price for unethical consumers.Additionally,the presence of piracy and premium services can reduce the price competition between the original product and the improved version.Freemium strategy always dominates traditional strategy except when the two following conditions are satisfied.First,the differentiation between the original product and the improved version in terms of consumer preference is relatively small.Second,the differentiation between the original product and the improved version in terms of product value is moderate.