Strategic Analysis of Corporate Software Piracy Prevention and Detection

Abstract

In this article, we investigate the prevention and detection of corporate software piracy, which is a serious concern to the software industry but that has received scant attention in the extant body of software piracy research. The strategic interaction between corporations that may consider piracy and the software coalition that investigates them, is represented by a one-period game theoretic model. Our analysis focuses on 2 scenarios distinguished by the type of information technology infrastructure (centralized vs. decentralized) used in the corporations. Under both scenarios, we identify equilibrium strategies and perform sensitivity analysis with respect to model parameters. Among other results, the sensitivity analysis suggests that a stricter penalty regime and higher level of compensatory damages to the software coalition are beneficial, whereas higher auditing costs and poor control structures to prevent software piracy are detrimental to the software industry's bottom line. We also found that the probability of audit and optimal audit cost are unaffected by the proportion of nonpirating firms. Also, there is an externality between firms, that is, if more firms pirate in an industry, location, or nation, then all such firms will face inspections.

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