The Revealed Demand for Pirate Goods: Probit Analysis of Experimental Data

Abstract

Infringement of copyrights and other forms of intellectual property is a large and growing problem around the world. It has been estimated that the intellectual capital of the SP the costs include direct monetary expenditure plus the probability of a being required to pay a penalty for consuming a pirate good. The data on individuals' choices reveal that the price effects of legitimate and pirate goods asymmetrical in the components of the price scale: An equal increase in the price of a legitimate good and the expected cost of a pirate good will increase the probability that a consumer will purchase the legitimate article. 1 Introduction Within forty-eight hours of the latest Hollywood movie being released in North America, illegal copies can be had on the bustling street markets of Hong Kong's Kowloon peninsula.1 The pirate copy may be of low quality filmed by a North American theater patron with a thousand-dollar video camera and then copied onto magnetic media-but customers snap up the goods like a hungry trout rises to eat a fake fly.2 Within a few months the quality of the pirate movie will increase until it is nearly indistinguishable from authentic copies. And the computer software junkie may nearly overdose at Hong Kong's Sham Shui Po street markets - within a three block radius lies a selection of software rivaling any online catalog, with prices little higher than the cost of the media onto which the files have been copied.3 The pirate goods sold in Bangkok, Dubai, Hong Kong, Singapore, and many other cities-- especially those in the developing world-are nearly always known to the buyer to be illegal copies of authentic merchandise.4 Seldom would a consumer paying US$200 for a Dunhill watch or US$100 for a Chanel handbag fathom that he or she is getting the authentic item in return for such a small payment; the price is an indication of the authenticity, if not the quality.5 In the case of high-priced brand-name consumer goods-- Rolex watches, Dunhill shirts, Prada handbags, etc.-the quality of the pirate goods is often considerably lower than the quality of the authentic items. But for some other types of goods the quality of the pirate good is nearly the same as that of the authentic article.6 For many computer and audiovisual products the pirate good is identical to the authentic article, except for the packaging and after-sale support.7 For example, music cd-roms will be an exact digital copy of the authentic product, but the linear notes will either be missing or the lyrics will contain numerous, and often humorous, typographical errors. Computer software will often only consist of the cd-roms with no printed manuals. this is much less an inconvenience than a few years ago, because software is often sold by the manufacturer with printed manuals as an extra-cost option, with the help files on the cd-rom as the default. Still, there is no guarantee that the pirate software will work, that it is free of viral infections, and there is no after-sale support. Reputation effects appear to enforce goodwill to the customer on the part of the pirate merchant: that the pirate copies sold are fully-functioning exact copies of the authentic product without viral intrusion. But beyond that, the customer is on his own. With this backdrop, we ask the question: What are the characteristics of the demand for pirate goods? Economic theory models potential customers as making choices based on constrained maximization, and demand is revealed as those choices change in response to variations in the constraint. …

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