Piracy and Bundling of Information Goods

ABSTRACT Bundling is considered to be an effective pricing strategy for zero-marginal-cost information goods. Yet, in many information-goods markets, the effectiveness of bundling remains hard to ascertain. This is because information goods exhibit other characteristics as well, which can potentially interfere with a manufacturer’s bundling decision. For instance, they are also prone to piracy, and it is not obvious what impact, if any, piracy can have on the efficacy of bundling. To address this issue rigorously, we reexamine the classic bundling problem with the backdrop of piracy and show that piracy can severely diminish the appeal of bundling to a monopolist seller. Evidently, bundling abets piracy and, in certain situations, so much so that the losses from piracy more than nullify the traditional benefits of bundling. This insight is in fact fairly generalizable. The implication for manufacturers of digital goods is that they need to take piracy into consideration in their bundling decision. In particular, they should consider refraining from bundling when the illegal products are close substitutes for the legal ones.