Pirating for Innovation

While the battle over SOPA and PIPA may have come to a close, the war over Internet piracy is far from over. One of the central lines of attack used by content creators in the piracy debate is that piracy hurts the economy. But does this position tell the whole story? New research suggests that piracy may be surprisingly advantageous for society.

In their article “The impact of piracy on innovation in the presence of technological and market uncertainty”, Dyuti Banerjee and Ishita Chatterjee argue that in the presence of technological and market uncertainty, contrary to content industry arguments, piracy can actually spur innovation.

While much of the literature on piracy and innovation concludes that piracy retards innovation, the authors argue that previous work has only considered a single firm facing solely technological uncertainty. However, in the real world, this scenario is often incomplete.

Banerjee and Chatterjee build a model that considers a scenario in which there are multiple innovating firms which face both technological and market uncertainty. Here, technological uncertainty refers to the probability of developing a new product, which is based on both randomness and the level of investment in Research and Development (R&D). Market uncertainty results from multiple firms participating in R&D competition.

The model plays out in three main stages. In the first stage, innovating firms compete on R&D investment to obtain a patent. In the second stage, the successful firm then competes on price with the pirating firm. Piracy will reduce the second-stage realized profits of the successful firm, causing firms to re-evaluate the level of R&D investment in the first stage. The less efficient firm thus will invest more while the more efficient firm will invest less. This will result in an overall increase in R&D investment if this efficiency gap is relatively large, thus increasing the overall probability of having a new product in the market due to increased competition in the first stage.

So, is the claim that piracy hurts innovation true? According to Banerjee and Chatterjee, in many cases piracy does exactly the opposite and actually increases innovation.

Banerjee and Chatterjee don’t elaborate on the implications of their findings for the fight against piracy or for proponents of bills like SOPA and PIPA. Still, the article does suggest that policymakers may want to reconsider the evidence when developing future anti-piracy legislation.