Back to Software “Profitable Piracy”: The role of information diffusion and delayed adoption Eric DARMON * Alexandra RUFINI † Dominique TORRE † March 2008 Abstract Can software piracy be profitable for a software editor? We tackle this issue in a simple model where software is an experience good and where the potential users of a software can choose to adopt or pirate a software or to delay their adoption. In that context, we show that a moderate piracy can be profitable for a software editor to foster users’ adoption. JEL Classification: D23, D42, L86 Keywords: piracy, experience goods, heterogeneous users, delayed adoption, sig- nalling. 1 Introduction The strategy of producers of digital goods (e.g. music, software) towards peer-to-peer communities has raised a huge theoretical debate about the existence of a so-called “prof- itable piracy”. Because of the network externalities generated by digital products, and because of their specific cost function (high fixed cost and negligible marginal cost), a firm may find it profitable to distribute its product for free in order (notably) to increase buyers’ valuation and to increase the price charged on regular consumers. For generic digital products, Gayer and Shy (2003) precisely analyze how peer-to-peer communities can be profitably used to enhance sales. In their model, potential adopters can either download or buy a digital good, these two goods are vertically differenciated and the downloaded product have a positive influence on the bought one (and conversely). Peitz and Waelbroeck (2006b) synthesize the literature in the case of digital products 1 . In the specific case of software, it has been first shown (Conner and Rummelt, 1991) that in the presence of network externalities, software editors may tolerate a “moderate” rate of piracy of their products. Shy and Thisse (1999) extend this result to a duopoly setting * University of Rennes 1 - CREM - CNRS, 7 place Hoche, 35065 Rennes Cedex, France. E-mail: eric.darmon@univ-rennes1.fr † University of Nice Sophia-Antipolis - GREDEG(DEMOS) - CNRS, 250 rue Albert Einstein, 06560 Valbonne, France. E-mail: alexandra.rufini@gredeg.cnrs.fr, dominique.torre@gredeg.cnrs.fr 1 See Varian (2005) for a general economic approach of copyright and piracy; see also Qiu (2006) for a general equilibrium analysis linking software production and copyright protection. 1