Selling and Leasing for Digital Goods with Piracy in Supply Chains

Recent press on piracy and digital goods touts the policy of leasing (as opposed to selling) as a “piracy killer.” However, the effectiveness of leasing is still controversial for digital goods in terms of the profitability for alternate supply chain members, including content providers (i.e., studios or publishers) and retailers. We develop an analytic model where market players either lease or sell digital goods in a market with both pirated and legitimate copies available. We compare the profitability of these alternate business models in a dynamic two-period setting and investigate how a firm optimally utilizes pricing to cope with piracy in a centralized supply chain (CSC) or a decentralized supply chain (DSC). Our results offer insights concerning the impact on firms utilizing alternate business models (i.e., selling or leasing) on different supply chain forms. We discover that leasing is associated with higher profits than selling in a CSC. In contrast, selling provides higher supply chain profit in a DSC, mainly due to the intertemporal competition. Surprisingly, we identify circumstances under which a DSC can have a more substantial supply chain profit than a CSC in a selling model. We also prove that the demand for pirated copies is lower for a CSC that utilizes a leasing model (as compared to a selling model). However, the demand for pirated copies is actually higher for a DSC that utilizes a leasing model (as compared to a selling model). Therefore, we confirm that leasing is not always an effective “piracy killer.”