Impact of Protection Level on Vertically-Differentiated Two-Sided Software Platforms

Introduction

Software piracy, illegal copying of software, or acquisition and unlawful distribution of digital products such as e-books continues to be a significant concern of many economic sectors. Extensive reliance on multisided online platforms on digital products has severely exposed them to the detrimental consequences of piracy. Two-sided platforms, defined as the mean through which users gain access to the products and services supplied by developers, play a significant role in balancing the market for digital products. All interactions of the involved parties (developers, users, etc.) are mediated through an intermediary or platform. Customers are attracted to the platform only if there are enough suppliers and service providers available. Similarly, developers find a platform interesting if there exists an adequate number of customers and users on the other side. Characterized by indirect network effect, platforms are trying to attract more of both parties to maximize their profit. The efficacy of this effort is impacted by several factors, one of which is the protection level of the platform.

Notwithstanding the importance of higher levels of protection on products’ quality, it can directly or indirectly impact the attractiveness of the platform for customers and providers. Despite the negative impacts of illegal products on multisided platforms, it can increase the platform's appeal to potential customers with different levels of willingness to pay which, consequently, boosts the attractiveness of the platform for suppliers and triggers the indirect network effect. In this study, we aim to address the impact of protection level on vertically differentiated two-sided platforms.