Costly Reporting, Ex-post Monitoring, and Commercial Piracy: A Game Theoretic Analysis

This paper examines the regulatory authority’s decision, following a report from the legal firm, on monitoring commercial piracy in a market characterised by asymmetric product differentiation. I show that with ex-post monitoring the government will monitor piracy under both price and quantity competition if the legal firm’s political influence is sufficiently high. The study also finds that there exists a unique level of the relative cross-price impact of the pirate’s price on the legal firm’s output, above which monitoring will be higher under quantity competition, and below which monitoring will be higher under price competition. Moreover, I show that when the government can credibly commit to monitor piracy the legal firm’s investment on innovation is higher under quantity competition than under price competition.