MICHAEL MORGENSTERN/THEISPOT.COM FALL 2019 MIT SLOAN MANAGEMENT REVIEW 13
T
his spring, HBO’s television series Game
of Thrones concluded after eight seasons.
Throughout its tenure, the show was in-
credibly popular while also earning the dubious
distinction of the most pirated television pro-
gram. The severity of piracy is duly illustrated
by the show’s season four finale, which, within
12 hours of its original broadcast in June 2014,
was illegally downloaded 1.5 million times,
amounting to 2 petabytes transferred in just
half a day. While an upsurge in piracy around
the time of the original broadcast may be natural,
a steady level of interest for pirated copies of
older episodes has continued unabated, well
after the episodes became available at retailers
online. Despite ongoing issues with illegal
downloads — there were 1 billion of the show’s
seventh season — HBO seems to have no real
plans to counter the illegal streaming services
and lets off perpetrators with only a slap on
the wrist.
This inaction on HBO’s part may have some
economic merit: Our research shows that a mod-
erate level of piracy — not too much, not too
little — can actually benefit the manufacturer,
the retailer, and consumers, all at the same time.Can Two Wrongs Make a Right?
The manufacturer does not usually set the retail price in a supply
chain; the downstream retailer does. In this case, HBO charges
cable operators, such as Comcast, a monthly per-subscriber fee,
corresponding to the wholesale price, and each cable operator
decides on its own margin, which determines the final retail
price. A wide variety of information goods (music, movies, TV
shows, video games, e-books, and software) in formats ranging
from shrink-wrapped discs to streaming content is brought to
the market through this wholesale model.In this setup, the supply chain faces a situation known as
double marginalization: Both the manufacturer and the retailer
decide on independent margins, each of which gets assigned to
the price of the good. Double marginalization manifests itself in
a higher retail price and reduced consumption compared with when
the manufacturer and retailer are owned by the same company.
Hence, an information-goods supply chain faces two strategic
challenges to pricing — piracy and double marginalization.
That’s why manufacturers and retailers may be better off with
a moderate dose of piracy — two wrongs can actually make a
right. When Comcast loses a Game of Thrones viewer to piracy, so
does HBO, which limits the pricing power of each. Even though a[INFORMATION GOODS]
‘Just Enough’ Piracy Can Be a Good Thing
It’s become costlier for retailers and manufacturers to combat piracy in the digital age.
But in moderation, it’s not all bad.
BY ANTINO KIM, ATANU LAHIRI, DEBABRATA DEY, AND GERALD C. KANE
RELATED RESEARCH
A. Kim, A. Lahiri, and D. Dey, “The ‘Invisible Hand’ of
Piracy: An Economic Analysis of the Information-Goods
Supply Chain,” MIS Quarterly 42, no. 4 (December 2018):
1117-1141.