Effect of Piracy on Adoption of Technological Innovation in the Entertainment Industry

Advances in technology have enabled producers of entertainment goods to reach customers in innovative ways. However, new technologies also make it easier for users to infringe on the content. Producers argue that piracy hurts their ability to innovate, while critics argue that piracy acts as a leveler and encourages consumer-friendly innovation. Answering what role piracy plays in the new technology adoption and social welfare is important from academic perspective and policy perspective. In this paper, we explore the interplay of piracy and technology adoption based on a two-period dynamic model. In this model, the firm always adopts the physical channel initially and has to make a decision on whether and when to adopt the newer digital platform to facilitate the release of a new format. The new platform can help the producer target broader customer base, but can be costly and might lead to higher piracy. We show that, when the cost of innovation adoption is small, piracy in the existing market has no effect on the timing of technology adoption. However, when this cost is sufficiently high, piracy in the existing channel will act as a competing force and lead to an earlier adoption of the digital channel if a large number of users are willing to move to the legal version at a full price. If not, piracy discourages and delays adoption. In addition, the risk of a higher level of piracy caused by new channel adoption can lead the monopolist to delay the adoption. On the welfare side, although consumers usually would benefit from a higher level of piracy when the adoption plan stays unchanged, consumers welfare might decrease when the producer either delays or accelerates the adoption in the face of piracy. Our model provides specific empirically measurable conditions that could be used to identify whether piracy is acting as a productive or a damaging role in technology adoption