EXPRESS: Regulating Digital Piracy Consumption

Regulators across the globe have imposed penalties on consumers for digital piracy consumption. Contrary to expectations, however, digital piracy consumption has continued to grow. We develop a simple model of competition between a copyright holder and a pirate firm to offer a plausible account for this observation as well as actionable guidelines for optimal regulation design. The core of our idea is to endogenize the pirate firm’s strategic investment in anti-tracking technologies that help consumers evade a regulator’s penalty. We find that as the penalty rises, piracy consumption can surprisingly increase after decreasing first; relatedly, the copyright holder and the society may suffer from tighter regulation. Depending on the cost of anti-tracking technologies of the pirate firm, the regulator optimally sets the penalty to operate in two different regimes. When the technology is available at a low cost, the regulator can achieve the goals of maximizing social welfare and minimizing piracy consumption simultaneously by setting a moderate penalty that maximizes consumers’ expected penalty and tolerates some level of piracy consumption. In contrast, when the technology is costly, the regulator should set a relatively high penalty to completely impede piracy supply. Additionally, we show that supply-side regulation does not substitute away demand-side regulation, and educating consumers about copyright protection may unintentionally lead to an increase in piracy consumption. Lastly, we identify complex non-monotonic long-run effects of piracy consumption regulation on the copyright holder’s incentives for content creation and copyright protection.