Copyright protection and entry deterrence

Illegal copying of digital products has become an increasingly debated issue. I present a previously unmentioned possible effect of piracy, namely that it may benefit an incumbent producer by making entry less profitable. In a differentiated products setting I show that when entry costs or the consumer valuation of the product are high enough or when consumer heterogeneity is sufficiently low, an incumbent monopolist will prefer less than full protection and thus allow the piracy of its own product. When the consumer valuations for the good are high, then there is no market expansion effect of illegal copying and consumers might end up worse-off because of piracy.