Does Piracy Dilute Software Prices?

The internet has a large amount of content devoted to online auction sites, namely eBay  I recently came across a guide that aims to help a consumer identify potentially pirated software  on auction sites (cited below). The primary warning sign of dubious material, according to the article, is that the price is well below what one would normally expect to pay for the software. My question is how does the presence of low-priced software dilute the price of legitimate software in an auction setting?

I can imagine three types of consumers that would be involved in the software buyer market. The first is the more wealthy consumer who is willing and able to pay the high costs for legitimate software with little concern of the price. The second is the buyer who would never purchase software at the high price because they are unable/ unwilling to do so. Most importantly, the third group (Group 3) would be somewhere in the middle where they would be willing to pay full price, but that they could be enticed to take the risk for a much cheaper option with possible lack of quality.

Without the presence of pirated material, the sellers of legitimate software would have more buyers because they would have the entirety of Group 3. They also all ascribe to a similar cost structure so the market price would definitely by higher. In the presence of piracy, Group 3 is fractured between the two types of sellers. With less buyers in the legitimate realm, would sellers decrease their prices to try to recoup the lost consumers? Would they be able to do so with their prohibitive cost structure?

Perhaps the cost of legitimate software would actually increase. This could be a wise move because the legitimate sellers would be able to exploit the inelasticity of the demand curves of their remaining clients.


One thought on “Does Piracy Dilute Software Prices?”

  1. I remember this happening when song prices on Itunes jumped from $1 to $1.50 basically overnight. All of a sudden, illegal music downloading became 50% more attractive. Although Itunes never reverted to $1 prices, I don’t think doing so now would help them recapture people they lost with the spike because the cost of switching from one software to the other is high in terms of convenience. There is also the cost of causing resentment that needs to be overcome to recapture consumers, which is variable from customer to customer.

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