Piracy In Entertainment Industry

Piracy leads to a fall in the sale of physical goods which consequently leads to a fall in revenue in entertainment businesses and also endangers the jobs of the creators of these (entertainment) digital products. Piracy has even raised concerns among representatives of the entertainment industry regarding the weakened enforcement of copyright protection. This they claim will have serious consequences with regard to bringing the works of new artists to the market and making them available for consumers. These have been attributed to causing losses in welfare in entertainment industries such as the music, movies and books industries. In the entertainment industry, it is not the creators or artists that impose copyrights on their products but

Digital goods such as music, movies and even books are created by several persons – hereafter referred to as artists. When these artists invest and produce a particular digital good although there are fixed resources that they use as inputs they do not have marginal costs of making copies of these goods. Intellectual property rights (copyrights) on these products make these goods marketable however to exert these rights, there are several transaction costs – of marketing, organizing the sales, performance and broadcasting rights - that have to be borne first. These costs still remain considerably high for the artists which is why they look to intermediaries in the entertainment industries (such as record labels and publishers) to enforce these rights on their goods. The marginal cost for these intermediaries is presumed to be constant and positive. These intermediaries act as monopolies in the market. Since they have a considerable amount of marginal cost, they tend to price their products at a higher level than the cost in order to incur profits from sales. These profits are what are shared with the artists (given in the form of royalties,

Here, we neglect the fixed costs of the artists as we are only looking at the market between the intermediaries of the entertainment industry and the consumers. The MC=MR pricing is a mode of profit maximization in a monopoly market as opposed to competitive pricing which entails pricing at the marginal cost itself. Pricing at above the marginal cost of production however also incurs deadweight losses. While such losses could be avoided by way of competitive market structures, in the monopoly in which the entertainment industry runs, this is not possible – primarily due to exclusive intellectual property rights.

The act of piracy therefore acts as a challenge posed to the monopoly power exercised by the intermediaries (or producers in this case for analysis) in the entertainment business. The marginal cost of reproducing the digital content is (at least in principal) zero. It can therefore be considered as a substitute for building the competitive pressure and thus helps in saving some social costs that are derived by the intermediaries.

The figure given below represents the monopoly market structure in which the entertainment industry functions. The demand for digital (entertainment goods) is shown by ‘D’. The Marginal Cost of production for the intermediaries (or producers in this