The Effect of Piracy on Markets for Consumer Transmutation Rights

We have shown in a previous study that selling content-transmutation rights to consumers increases total surplus of both producers and consumers of digital products. Our results were conditional on the absence of piracy. There has been some research on the effect of online piracy in traditional content markets that do not consider consumer transmutation. Some claim that piracy damages producers´ surplus because it causes decline of music sales. At the same time, others claim that piracy, under certain conditions, has beneficial effects on production of digital products and increases profitability. The purpose of this study is to investigate whether piracy can damage the benefits related to the introduction and exchange of consumer modification rights. As a first step, we consider a market with a strong form of piracy and show that the presence of extreme piracy destroys the producers´ profit and that all surplus is transferred to consumers. In addition to causing lost sales piracy in markets with transmutation damages the market´s information and coordination function.