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If You Provide It They Will Pay

Have you ever pirated something? Pirated software and media account for billions of dollars in losses each year for the software, music, and video industries. Companies have attempted to mitigate the damages they suffer from this problem through aggressive litigation and deterrents such as education about copyright infringement. While this has had some affect, I posit that the action needed is to actually change how industries deliver content to consumers.

The Oatmeal is a comic writer whose website presents commentary on many real life situations through the use of humorous storylines and portrayals. In one of his recent postings at http://theoatmeal.com/comics/game_of_thrones he illustrated the tradeoff consumers often face when trying to obtain media produced by the movie industry. The comic portrays his search for a specific video and the tradeoffs between legally obtaining the content and pirating it. He makes it easy to see potential tradeoffs by using the symbolic characters of an angel and a demon on his shoulders to talk about his thought process.

This same tradeoff analysis can easily be turned into a matrix which will show the game theory equivalent of this situation. For a customer, the factors which are considered include cost, easy of obtaining, time to obtain, legal repercussions, and moral or ethical considerations. The total customer payoff is a sum of each of these factors. For a media company the considerations include cost to distribute, offering price, and number of purchasing customers. The total payoff for the media companies is the product of the offering price minus the cost to distribute, and the number of customers. The consumer then has two basic options, to purchase or to pirate the media. The media company has three options, to distribute physically, to distribute physically and digitally, or to delay distribution. A payoff matrix for these options is shown below:

As you can clearly see, the company suffers from a net loss in payoff whenever a consumer chooses to pirate rather than purchase.  For this reason, it seems like the company’s optimal strategy would be to ensure the customer payoff for purchasing is at least equal to than the customer payoff for pirating so long as this does not decrease the company payoff.   More specifically, the media companies should always follow the dominant strategy and distribute media in both digital and physical forms.  Instead, The Oatmeal faced the situation opposite situation where the media company was delaying distribution and thus minimizing their payoff.  The optimal position for both parties and the Nash Equilibrium of this matrix occurs when the media company distributes media in both forms and the consumer chooses to purchase the media.  Software such as Netflix has helped companies make the transition from physical distribution to mixed distribution, but some companies still delay distribution which is hurting their bottom line and pushing consumers to choose to pirate.  If these numbers are any indication, the market will eventually push companies to offer immediate availability of content in both digital and physical format, in order to maximize everyone’s payoff.

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