Product Quality in the presence of Network Externality and Commercial Piracy

Our paper develops a two-stage sequential game between an incumbent and a pirate to find the optimal quality level of the firm in the presence of network externality. The results show that the incumbent in the presence of piracy chooses minimum quality for its product and undertakes an anti-copying investment that adversely affects the effective quality level of the pirated good. Further, under SPNE the incumbent becomes a price leader and the pirate chooses to be a follower.