Revisiting the incentive to tolerate illegal distribution of software products

Motivated by the recent strategy switch of a large software producer, this paper revisits the trade-offs associated with tolerating illegal distribution of software products. Conventional wisdom is that a higher level of positive network effects justifies a tolerant approach on the part of software producers—because illegal distribution leads to more users, amplifies positive network effects, and creates a greater demand for the legal version. I show that this wisdom does not hold in the context of supporting illegal versions with patches. Patches are used for plugging security vulnerabilities as well as for distributing functionality changes. Software producers have the option of supporting illegal versions with either or both kinds of patches. I find that, even in the presence of strong positive network effects, the least tolerant approach of denying illegal versions both kinds of patches can be optimal.