| Abstract: |
This paper generalizes the two-period model of Watt (2000) who demonstrates
the possibility of optimal accommodation of a pirate when the royalty rate
applying to a creation is uniform and second-period Cournot competition
applies. Admitting nonlinear contracts with period-specific royalty rates that
leave total payments unchanged, simulation analysis shows that a producer of
originals does better to increase the royalty rate in period 1 and decrease
the rate to a negative level in period 2, thereby more than offsetting the
usual cost advantage available to a pirate. Watt's illustrative examples
regarding piracy accommodation (but not piracy exclusion) are overturned when
a nonlinear contract is chosen optimally, although accommodation remains
optimal in some other cases. Further, where exclusion is impossible under
uniform royalties, cases exist where exclusion is feasible under nonlinear
royalties. Even so, accommodation may be a preferable strategy. |