| Abstract: |
In the following, we examine a market of a digital consumption good with
monopolistic supply. In this market, it is the ability of the consumer to
bypass (”crack”) the copy-protection of the monopolist which induces a lower
price of the digital good, compared to an uncontested monopoly (textbook
case). We analyze the complex relationship between the cracking efforts of the
consumer, the copy-protection efforts and the pricing decision of the
monopolist, and the welfare of the economy. We find, for example, that the
monopolist will deter piracy if the (exogenous) relative effectiveness of the
consumer’s bypassing activity is low compared to the copy-protection
technology. In this case welfare is lower than the welfare in the textbook
case. On the contrary, welfare rises above the textbook case level if the
relative effectiveness of cracking is sufficiently high. |