Accepting or fighting unlicensed usage: Can firms reduce unlicensed usage by optimizing their timing and pricing strategies?

The rise of the Internet and new online services have led to the wide-scale illegal distribution of digital entertainment products, such as music, movies, games, and books. We analyze whether firms in the entertainment industry should fight unlicensed usage by providing specific offers that maximize the utility for segments relying on unlicensed usage, i.e., by optimizing timing and pricing strategies, or whether they should simply accept a certain level of unlicensed usage. We combine Becker's (1968) economic approach to analyzing social issues with random utility theory to develop a choice model for media products in which we account for unlicensed usage. We then apply the model in two large-scale empirical studies on movies and books. The results show that consumers who prefer unlicensed usage are sensitive to the marketing mix to some extent in both markets. However, optimizing timing and pricing only has limited impact on additional revenue generation. Thus, from a managerial perspective, it is very difficult to reduce the relative loss due to unlicensed usage by providing targeted offers.