Impact of piracy on innovation at software firms and implications for piracy policy

In this paper, we look at how innovation in the presence of piracy is affected by the policy choice of alliances such as the Business Software Alliance (BSA). Surprisingly, we find that a stricter piracy policy, that increases the perceived cost to using pirated software for end-users, may in some cases lead to an increase in piracy, and a decrease in product quality. The implication for a social planner is that in a monopoly market, an increase in the policy variable, could act as a disincentive for innovation. In a competitive market an increase in the policy variable provides an incentive for innovation.