Mike Shor: Research




Copying of Information Goods:
The Effect of Network Structure on Firm Profits

Mikhael Shor and Michael Galbreth

Revised September 2008


Abstract

Traditionally, illegal copying of information goods has been viewed as detrimental to firms as illicit copies compete directly with new products. In this paper, we present a model of probabilistic group formation for the purpose of copying. The effects of copying on firm profits are examined given two key market characteristics: the network structures that give rise to groups of consumers and the internal cost-sharing mechanisms within groups. We find that illicit copying can increase firm profit when consumers adopt an efficient cost-sharing mechanism. Otherwise, firms prefer the absence of copying; however, when copying activity can only be controlled within a limited range, firms may prefer more copying to less.