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Versioning and Piracy Control for Digital Information Goods

Nanyang Business School, Nanyang Technological University, Singapore
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15260
sywu{at}ntu.edu.sg
pychen{at}andrew.cmu.edu

Technological advances in digitalization and communications technologies have aggravated the information goods piracy problem. In contrast to previous literature which mainly considers solutions, such as law enforcement or technology protection that work on increasing individual piracy costs to alleviate the piracy problem, we consider using versioning as a potential instrument to fight piracy. We show that while a single version is the optimal strategy for an information goods provider absent piracy, the presence of piracy may lead firms to offer more than one quality, and versioning can be an effective and profitable instrument to fight piracy for digital information goods under some conditions. Our results indicate that the incentive to version is greater when the piracy cost is in a certain range. This strategic interaction between piracy cost and product line design has an interesting implication on optimal investment in piracy control. We also find that versioning can act as both a strategic substitute and a strategic complement to other instruments that increase consumer piracy costs. We further provide a general model, as a nonlinear mixed-integer program, that would assist an information goods provider in determining how many versions to offer, at what quality levels and prices.

Subject classifications: information systems; digital goods piracy; programming; nonlinear mixed integer; marketing; versioning; pricing.
History: Received September 2005; revision received November 2006; accepted January 2007.