Some providers of digital products, such as software, music and film, may turn a blind eye to or even encourage piracy of their goods, according to new research by Karen Croxson presented at the Royal Economic Society’s 2008 annual conference. They do this because while piracy may harm sales, it can also serve to provide free marketing, helping to create buzz about a product.

The most high profile example of buzz is the Arctic Monkeys, a British music group, which distributed its initial songs freely online. But firms in other industries may benefit from the same effect. Makers of office software such as Microsoft may enjoy a net benefit from piracy: business users are unlikely to copy the product, and others who copy it would not have bought it anyway. Thus, the main effect of piracy is extra cheap promotion, and this in turn may explain why copy protection applied to office software is relatively weak.

In some other markets, the presence of a free copy may result in many consumers who would have bought finding themselves tempted instead to download the product for free. Piracy will undermine legitimate sales in such cases, without necessarily raising consumption: there may be no free extra buzz. This is the more likely scenario in the market for console games, the study suggests, and this helps to understand why companies such as Sony or Nintendo, which make console games, invest heavily in copy protection.

The rise of digital piracy

Developments in computing and the internet have had many liberating effects. End-users can now acquire near perfect copies of many creative works, and often can do so instantaneously (though not entirely without cost). The unauthorised copying of digital goods such as software, music and films a practice referred to as digital piracy has been claimed to place in peril the viability of whole industries. With perceived losses running so high, one might expect to see all sellers moving mountains to safeguard their intellectual property technologically. In fact there are some puzzling differences in attitudes.

Makers of console games such as Nintendo and Sony invest heavily in draconian anti-piracy measures (their systems are notoriously difficult to crack). But providers of office software such as Microsoft have publicly referred to the casual copying and softlifting of their products, seemingly admitting that these are more easily replicated. There is even evidence that business software manufacturers reduced copy protection following the arrival of personal computers in the 1980s.

The analysis in this research report confirms that piracy can displace sales but highlights the importance of being realistic about this: not every copy implies a lost purchase. In any market there are some who value the product but never would buy (perhaps children with limited pocket money) and their piracy poses no threat to sales.

Given that the cost of piracy is likely to come down to a personal calculation (related to such things as the value of time, fear of penalties and moral costs), there may be variation across markets in the genuine sales threat the temptation to pirate by those who would otherwise buy. This goes some way to explaining protection differences.

In addition pirates may help promote the products they steal and this too may weigh on protection decisions. Both bought and pirated software spreads information about a product in guerrilla fashion. Word-of-mouth communication, what marketers sometimes term ‘buzz’ can drive sales success.

Indeed, the sudden rise from obscurity of the Arctic Monkeys attests to the power of buzz: the instant success of the music group’s first album was due not to traditional marketing muscle but to the energy of early consumers who hyped its songs through social networking site myspace.com.

The study brings together these two effects business stealing and promotion. It shows that in markets where the former is more important, firms are more likely to invest in copy protection measures. But in some other cases promotion could be the dominant consideration, and there firms will be less likely to invest heavily in copy protection.

Consider computer games. Many games are targeted at, and probably most valued by, a youth market. Yet the piracy costs of young people may be small, not least because they have more free time and forgo less income by spending time on piracy. In such a market, copying can undermine sales without generating extra promotional benefits (those who pirate would have bought anyway), and this can help explain the drastic protection measures applied.

Contrast this to the market for business software: professional users attach higher worth to office software than do, say, students. At the same time, they are likely to have higher piracy costs (owing to a higher monetary value of time and conceivably greater concern about legal repercussions). With valuable users shying away from copying, the seller in this market finds itself more naturally insulated against lost sales. Moreover, those who pirate, many of whom probably wouldn’t have purchased, represent (virtually) free promotion. A weak appetite for protection is more intelligible in this light.

Promotional Piracy by Karen Croxson was presented at the Royal Economic Society’s annual conference at the University of Warwick, 17-19 March 2008. Karen Croxson is at Oxford University.

For further information Karen Croxson on 01865 279484 (email: karen.croxson@economics.ox.ac.uk); or Romesh Vaitilingam on 07768 661095 (email: romesh@compuserve.com).

Read more papers by Karen Croxson at EconPapers and search Intute: Social Sciences for more on the topics of piracy, copyright and electronic commerce.

A key argument for the introduction of the euro was that it would make prices transparent across Europe, thereby fostering competition and lowering prices. But research by Michael Baye, Rupert Gatti, Paul Kattuman and John Morgan reveals that in fact online shoppers in the eurozone have lost out relative to their counterparts elsewhere in the European Union (EU) following the currency changeover. Their results were presented at the Royal Economic Society’s Annual Conference.

The researchers find that the euro changeover neither mitigated price differences nor resulted in purchasing power parity for products sold online, either within or between countries. In fact, average prices charged by e-retailers within the eurozone increased by about 6% relative to those in EU countries not adopting the euro. The impact on the minimum or best prices in each country was even more dramatic, with the lowest online prices in the eurozone rising by 11% relative to non-eurozone e-retailers.

One popular explanation for price increases associated with the introduction of the euro has been that retailers held off making anticipated price rises until the euro was introduced (to avoid the cost of changing prices twice in short succession). In fact, the dynamics of price movements observed in this study do not support this explanation.

The researchers offer an alternative explanation that is not only consistent with observed pricing behaviour, but which has potentially significant long-term implications for prices and welfare. The increase in competition for well informed and price sensitive consumers across eurozone countries may have encouraged firms to shift their focus towards selling products at higher average prices to domestic customers who are less informed and more brand-loyal. In other words, the results suggest that the arrival of the euro benefited informed consumers at the expense of the less well informed.

The research also highlights the role of competition in fostering lower prices. Relative to markets where only one firm lists a price for a product, there is a 3% decline in average prices when a second firm is in the market. There is a 4% decline when three firms compete and a 6% decline when more than three firms list prices (correcting for product differences, countries and time).

The results for minimum quoted prices are even more dramatic. The addition of a second firm leads to a 12% reduction in minimum price. When three firms list prices, there is a 16% reduction; and when more than three firms list prices, the minimum price fall by 20%.

From a policy perspective, this suggests that the impact of increased market participation is potentially very large and may well outweigh issues that have arguably drawn greater attention, such as tax harmonisation across EU member states.

These findings are based on an extensive dataset collected over a nine-month period straddling the introduction of the euro, October 2001 to June 2002. These data were obtained from Europe’s dominant internet price comparison site, Kelkoo.com, and include the prices charged for 28 specific products sold in seven different EU countries. Four of these countries (France, Italy, the Netherlands and Spain) are members of the eurozone and three countries (Denmark, Sweden and the UK) are not.

The research controls for a variety of other factors that might contribute to post-euro price changes, such as differences in products, product life cycles and changes in the number of firms listing prices in each country. Controlling for these and other factors, average online prices in the eurozone in October 2001 were about 5% lower than in the three EU countries not participating in the euro. But by May 2002, this price advantage had been completely wiped out.

Similar results are observed for the minimum or best prices quoted for each of the products. In October 2001, online shoppers in the eurozone enjoyed 9% lower prices than those shopping in non-eurozone countries but once again this advantage had evaporated by May 2002. Furthermore, significant differences in the average price charged and the best price available in these countries remained throughout the period.

Notes

Online Pricing and the Euro Changeover: Cross-country Comparisons by Michael Baye, Rupert Gatti, Paul Kattuman and John Morgan was presented at the Royal Economic Society’s 2003 Annual Conference at the University of Warwick.

Rupert Gatti and Paul Kattuman are at the University of Cambridge; Michael Baye is at Indiana University; and John Morgan is at the University of California at Berkeley.

For further information contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Related information

You can find other publications by these authors, related research and citations from IDEAS and you can search for more Internet resources on the topic of the euro and Single Market Issues on SOSIG.

Economics in Action is a collaboration between the Royal Economic Society, the Economics Network of the Higher Education Academy and SOSIG, the Social Science Information Gateway. It forms part of the Why Study Economics initiative.

Anyone who is good at using computers or communicating can expect to earn considerably more than their educational qualifications alone would suggest. That is the central conclusion of research by Professor Francis Green and Dr Andy Dickerson, presented at the Royal Economic Society’s Annual Conference.

Their analysis of the 2001 Skills Survey, a nationally representative survey of 4,500 working individuals in Britain aged 20-60 (and compares it with a similar survey of 2,500 individuals in 1997), shows that:

High-level communication skills and computing skills are highly valued in the labour market by employers, whatever people’s formal educational qualifications happen to be. Employees whose jobs involve using computers have been receiving on average a 13% pay premium.

Among computer users, those who raise their computing skills are rewarded yet more. Moving from a job that just requires straightforward computing skills, such as printing out invoices, to one which requires more complex computer usage, such as word-processing or analysing information with a simple statistical package, yields between 6% and 10% more pay. More advanced computing skills get even higher rewards.

Employees who acquire high-level communication skills, such as the ability to make presentations and write reports, also gain higher pay.

Key skills or generic skills, those that are supposed to be useful in all jobs, are now everywhere in the school curriculum and in the mantras of further and higher education. But how much are generic skills being used in the workplace, and how are they valued? Green and Dickerson’s research shows that:

Almost all generic skills are being used more extensively now than in 1997. All types of communication skills are growing, as are planning skills and problem-solving skills, and literacy and numeracy.

Computing skills are being expanded the fastest. In 1997, computers were essential for just over 30% of Britain’s workers, but by 2001, this proportion had increased to 40%. Only about 1 in 5 of us make no use of computers in some way or another at work.

The only generic skills that are being used less and less in the workplace are physical skills such as stamina and strength.

One day, computing skills might become a bit like driving a car: almost everyone learns to do it and nobody pays you more for it. But these findings suggest that the day of satiation has not yet come: anybody who can become good at using computers or at communicating can still expect to be able to command a pay premium in the labour market, beyond what their educational qualifications alone will give them.

Professor Green said:

‘Our study shows the far-reaching influence that new information technologies are having on people at work in Britain. The good news is that, whatever your education has been, people who take on the jobs that require the new skills are getting rewarded with better pay. But workers who do not have access to the new technologies are not doing so well.’

Notes

The Growth and Valuation of Generic Skills by Francis Green and Andy Dickerson presented at the Royal Economic Society’s 2003 Annual Conference at the University of Warwick.

Green is Professor of Economics at Keynes College, University of Kent at Canterbury; Dr Dickerson is at the University of Warwick.

The 2001 Skills Survey, which collected information about skills used at work and about workers’ pay and conditions, was commissioned by the Department for Education and Skills from the ESRC Research Centre on Skills, Knowledge and Organisational Performance (SKOPE), based at the Universities of Oxford and Warwick. The survey was carried out by a team directed by Professor Green.
For further information contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Related information

You can find other publications by these authors, related research and citations from IDEAS and you can search for more Internet resources on the topic of Labour Force and Market on SOSIG.

Economics in Action is a collaboration between the Royal Economic Society, the Economics Network of the Higher Education Academy and SOSIG, the Social Science Information Gateway. It forms part of the Why Study Economics initiative.