So what’s the big deal about Internet piracy you ask? According to Chellappa et al., the rate of software piracy in the Asia-Pacific region has been estimated at 53% for 2004, and over 90% in Southeast Asian countries. [1] Piracy costs US firms nearly $60B a year and has shaved 373,000 jobs out of the United States economy. [2] However, losses that businesses realize regarding piracy have one fatal flaw – they assume that every product that is pirated would otherwise have been purchased at full market price. [3] This assumption is wrong because it ignores the basic rules of market theory.

Market equilibrium is the state of equality between the amount of a product supplied and demanded. [4] Where there is a glut of supply (surplus) or demand (shortage), the market is said to be in disequilibrium; this is currently the case in many industries where intellectual property may be pirated due to corporate interference with market mechanisms to maintain the market price above its natural equilibrium price. [5] In this situation, there are two classes of individuals who will consider pirating IP: those who would purchase at the natural equilibrium price and those who would not. The first type is the group that firms can capture by lowering the price to a true equilibrium; the second type still desires the good supplied but not enough to purchase it at the market price. [6] When firms announce their losses due to piracy, they are quoting the gross loss; since this number includes pirates in the second group of consumers, it is not a true valuation of actual, realizable profits lost due to piracy.

With the arguments against piracy thwarted, what are the plausible benefits of piracy to society and to holders of intellectual property rights. First, Internet piracy increases efficiency and productivity in the market. [7] Consider the following example, a young person in a third world country with no access to credit has the ambition and ability to become a successful software entrepreneur but cannot afford the programs necessary to begin his career. In a world without piracy, the young person has little or no hope of success but, in a world with piracy, the young person can obtain the software and begin his career. Assuming he values the software at or above the market price, his success will afford him the resources to legally purchase future software needs. This is a win-win situation for the IP holder and the entrepreneur. Second, piracy allows consumption by below-equilibrium product demanders. [8] This is illustrated by considering the supply-demand model. A surplus of demand can be considered consumers who would consume if the price were lower; since the price of pirated goods is at or near zero, everyone in this group is allowed to consume the good – increasing the overall societal production of utility. Additionally, since pirated goods are digital, this increase in demand does not eat up scarce resources. Finally, piracy opens up new avenues for profit maximization by IP holders via below-equilibrium consumers. [9] By linking non-piratable goods (tangible goods) to the consumption of pirated goods, firms can engender sales to below-equilibrium consumers.

With exaggerated negative impacts and many positive impacts, there is a strong case for encouraging Internet piracy at the margins and with below-equilibrium consumers.

End Notes:

[1] Ramnath K. Chellappa et al., An Empirical Examination of Global Software Piracy: Pricing and Policy Implications, Goizueta Business School, Emory University, 2006, available at http://www.bus.emory.edu/ram/Papers/global_piracy.pdf

[2} Wolfgang Gruener, Copyright piracy takes a $58 billion hit on U.S. economy – report, TGDaily, Friday, October 05, 2007, available at http://www.tgdaily.com/content/view/34228/118/

[3]Id.

[4] EconModel, Definition of Equilibrium in Economics, http://www.econmodel.com/classic/terms/equilibrium.htm (last visited October 15, 2007).

[5] George C. Bitros and Ioanna Minoglou, Entrepreneurship and market order: Some historical evidence, MPRA, October 24, 2006 available at http://mpra.ub.uni-muenchen.de/573/01/MPRA_paper_573.pdf

[6] Id.

[7} Robert L. Frost, Rearchitecting the music business: Mitigating music piracy by cutting out the record companies, First Monday, July 10, 2007 available at http://www.firstmonday.org/issues/issue12_8/frost/index.html

[8]Id.

[9] J. Farchy, Seeking Alternative Economic Solutions for Combating Piracy, Society for Economic Research on Copyright Issues, 2004 available at http://jobfunctions.bnet.com/whitepaper.aspx?docid=141505