ABSTRACT
Illegal file sharing is an increasingly important determinant of profitability and distribution choices of companies in many industries. Illegal file sharing is often complicated by Internet congestion and lax enforcement. Thus, customer experience and firm-profitability can be vastly improved by piracy-minimizing and profit-maximizing sanctions that also reduce enforcement costs and monitoring costs. Such optimal sanctions are defined not only in terms of customers’ opportunity costs (waiting time, search costs, value of customer’s time, etc.) but also in terms of willingness-to-comply with intellectual property (IP) laws, expected post-purchase customer nonmonetary utility, customer’s wealth and relative wealth, and customer’s marginal propensityto-substitute digital products. These optimal sanctions can minimize the firm’s monitoring/ enforcement costs and delivery costs and can also result in lower perceived prices for high-priority customers and uniform quality of service for all customers, all of which are socially more optimal outcomes when different customers place different values on compliance with IP laws. This article
(1) introduces models of information-producing firms that have unknown demand and that sell digital products to customers who have heterogeneous waiting costs and (2) introduces models of optimal sanctions (that incorporate evidence issues) that minimize losses from illegal file sharing, minimize monitoring/enforcement costs, and simultaneously maximize priority revenue for the information producer under different assumptions regarding customer behavior/utility and unknown demand.
