14 MIT SLOAN MANAGEMENT REVIEW FALL 2019 SLOANREVIEW.MIT.EDU
limitation on its own pricing power is not
good for the manufacturer, the limitation
on the retailer’s power surely is, and vice
versa. A moderate level of piracy thus can
limit the negative impact of double mar-
ginalization on both sides, benefiting all
parties in the supply chain. Meanwhile,
consumers welcome the lower price.
’Shadow’ Competition
Can Benefit Everyone
Piracy injects a degree of “shadow” com-
petition into a supply chain — that is,
competition that comes from reproduced
versions of the authentic original, as op-
posed to new offerings being developed
and produced by an external company.
In traditional upstream and downstream
competition, more competition is good
for some parties but bad for others. By
contrast, piracy competes with the manu-
facturer and the retailer simultaneously,
limiting each just enough so that both are
better off.
Conventional wisdom holds that the
inefficiencies in the supply chain, which
manifest as double marginalization, could
hurt consumer consumption and aggra-
vate the situation for both parties. Reports
from both academia and industry have
illustrated that piracy reduces companies’
pricing power and hurts profits. But our
findings challenge these ideas within the
context of an information-goods supply
chain, in which a manufacturer not only
faces competitive pressure from piracy but
also lacks direct control over the final price.
When facing both of these hurdles, the
manufacturer comes out further ahead in
a moderate piracy situation than it would
if it were dealing with just one of these
supply chain challenges.
Moderate levels of piracy may benefit
information-goods companies in other
ways as well. For instance, companies
and platforms can make gains through a
positive network effect (the more people
use the product, the more valuable it be-
comes) and consumer learning (pirate
users may learn about the product and
buy the legal version later on).
Although prior studies point out posi-
tive primary effects of piracy, the primary
effect in our context is negative: It sup-
presses companies’ pricing power.
However, the secondary effect of this is
positive. When HBO reduces its margin,
Comcast’s revenues rise accordingly;
when Comcast in turn reduces its price, it
gains more customers, benefiting HBO.
Consumers, for their part, benefit from
lower prices for the authentic product.
This surprising “win-win-win” situa-
tion reminds us of Adam Smith’s invisible
hand: Even when all players act in their
own self-interest — the manufacturer
and retailer maximizing their profits and
consumers maximizing their utility —
somehow, every actor becomes richer in
the process.Of course, the benevolent effects of
moderate piracy that we identify here
should not be construed as an endorse-
ment of piracy. When piracy is rampant,
its negative impact dominates, making
both companies worse off, much as one
might expect. Nevertheless, antipiracy
measures are often expensive, so before
going full force against piracy, organiza-
tions should pause to ponder whether,
and to what extent, doing so would be
a worthwhile investment.Feeling Your Way Toward
‘Just Enough’
What do moderate levels of piracy look
like? “Just enough” is hard to define because
it can depend on a number of factors,
including size of the market, production
costs, and details of supply chain contracts.
It’s less difficult to identify instances where
the levels of piracy or the levels of anti-
piracy efforts are clearly immoderate.
The implication is that companies
should engage in common-sense efforts to
combat piracy, focusing on the most egre-
gious and high-profile offenders and simply
monitoring the more moderate pirates to
ensure they do not get out of control. In the
end, the smaller players may be too difficult
and costly to combat — and they could play
a valuable role in the information-goods
supply chain ecosystem.Antino Kim is an assistant professor of in-
formation systems at the Kelley School of
Business, Indiana University. Atanu Lahiri
is an associate professor of information
systems at the Naveen Jindal School of
Management, University of Texas at Dallas.
Debabrata Dey is the Marion B. Ingersoll
Professor of Information Systems at the
Foster School of Business, University of
Washington, in Seattle. Gerald C. Kane
(@profkane) is a professor of information
systems at Boston College’s Carroll School
of Management. Comment on this article
at http://sloanreview.mit.edu/x/61112.Reprint 61112. For ordering information, see page 4.
Copyright © Massachusetts Institute of Technology,- All rights reserved.
FRONTIERS
‘Just Enough’ Piracy Can Be a Good Thing (Continued from page 13)
Companies should engage in common-
sense efforts to combat piracy, focusing
on the most egregious and high-profile
offenders and simply monitoring the
more moderate pirates to ensure they
do not get out of control.