Piracy as an entry deterrence strategy in software market

• We study the incumbent’s entry deterrence strategy in the presence of piracy in the software market. • The incumbent’s piracy deterrence strategy and the entrant's market entry decision are analyzed. • Piracy can make the incumbent suffer a less loss when there is an entrant. • Piracy may be used to prevent the entry of the entrants under certain conditions. Piracy is commonly believed to be detrimental to legal suppliers, so strong enforcement against piracy is expected. However, in practice, some companies do not deter piracy actively which seems counterintuitive. To explore the rationale behind the uncommon phenomenon, this paper explores the piracy issue from the entry deterrence perspective. In particular, we study an incumbent’s entry deterrence strategy using piracy when facing a potential entrant who offers similar products in the market. The incumbent decides whether to deter the piracy, and the entrant chooses whether to enter the market by anticipating the competition in the potential market and the entry cost. By analyzing the strategies of both the incumbent and the entrant, we find that deterring piracy is not always a good strategy since piracy could be used as a deterring strategy on the entrant, which explains the practices in many companies. Specifically, we find that when the entry cost is moderate, the incumbent accommodates piracy when the entrant is more of a threat, and piracy serves as a partner of the incumbent to prevent the entry of a powerful entrant. This conclusion also holds when considering the entry deterrence cost, network effect and the entrant is a high end substitute.