Why does the pirate decide to be the leader in prices?

Résumé

We analyze the roles of the government and the incumbent in preventing piracy, and the reasons and incentives why a pirate would want to be a leader in prices. The framework of analysis used is a duopoly model of vertical product differentiation with price competition, where both incumbent and pirate are committed to keep their prices. We find that both government and incumbent have a key role in avoiding the entry of the pirate. We show that the government will not help the incumbent to become a monopolist, even if he installs an antipiracy system, because a monopoly provides the lowest social welfare. However, he will let the pirate enters as a follower or as a leader, or encourage the incumbent to deter the entry of the pirate, which depends on the technology of the government for monitoring piracy. The pirate decides to become a leader to avoid being brought down by the incumbent and the government, although the leader's profit is lower than the follower's profit. Finally, we find that high-income countries with cheaper monitoring technology have lower piracy rates.