Piracy and Quality Choice in Monopolistic Markets

We study the impact of piracy on the quality choices of a monopolist. In the absence of piracy, the monopolist has no incentive to differentiate its products. With piracy the monopolist might instead produce more than one quality, so that differentiation arises as the optimal strategy. This is because the producer wants to divert consumers from the pirated good to the original one. Differentiation involves producing a low-quality good such that piracy is either reduced (albeit still observed in equilibrium) or even eliminated. The enforcement of copyright laws reduces the incentive to differentiate, stressing our result that differentiation is a reaction to piracy