Sensitivity To Tax Revenues and Optimal Anti-piracy Policy Instruments

Abstract: We examine the effects of a government’s sensitivity to its tax revenues, earned from the software industry, on its anti-piracy policies that consists of monitoring and penalizing a commercial software pirate. We consider a strategic entry-deterrence framework where the original producer chooses a pricing strategy that either allows or deters the pirate’s entry. Sensitivity to tax revenues is a necessary but not a sufficient condition to prevent piracy. Welfare maximization may or may not result in monitoring as the socially optimal outcome. If monitoring is socially optimal then the pirate’s entry is deterred. The equilibrium entry-deterring price may be less than the equilibrium monopoly price. Only in the extreme case the monopoly outcome is restored.