Optimal Enforcement for Content Industries under Positive External Effects of Piracy

Abstract Content industries have several profit sources that positively interact with one another, and piracy affects them not only negatively but also positively. For copyright holders, choosing to allow piracy depends upon its total external effects. This paper proves that in such case the profit function is convex with respect to the level of enforcement. This paper shows a convex profit function with respect to the level of enforcement. The convexity leads to a corner solution of optimal enforcement for copyright holders. Which corner solution is selected depends on the relative size of the sub-market, and no enforcement is profitable if the submarket size is relatively large. This result compensates for a shortcoming of discussions that assume only two options regarding the level of enforcement, zero or perfect enforcement.