The Optimal Protection and Pricing for Software Products in the Presence of Network Externalities

Piracy has been claimed to be the major problem of software sales. It is traditionally believed that piracy will have negative effects on the revenue of software producers. However, in the presence of network externalities, piracy enlarges the user base, and thus will increase the value of the software, which is a positive effect to producers. This paper investigates the optimal protection level and pricing policy in the presence of network externalities. We found that (1) optimal price should be greater than marginal cost, (2) the optimal protection depends on net network effect and marginal cost, and (3) the effects of price change to total revenue is related to the demand elasticity and net network effect.