As I am writing this, I am trying desperately to stave off sleep. I am doing this purely to keep myself awake (I am at office: falling asleep at my desk would not look good on me). So I apologize if I seem a bit ….. incoherent.
What nonsense fills my mind today? Well, it is actually something we have all indulged in. The darkest economic force that exists in the world today, that makes the capitalists tremble in their mighty cement towers. A phenomenon that exists in the nightmare of anyone working in the Industry of Entertainment. I am talking, of course, of Piracy – more specifically online piracy. Something that seems to affect us far more than gun-toting impoverished Somalis.
Now, we all have as many viewpoints on piracy as the no. of cooking shows on-air. It depends on the type of discussion we might have. In an ethics class, we might shake our heads and say “Nay! Stealing is wrong!” In a friendly discussion of one-upmanship we might insist that all the illegal downloads we do are “For a taste” and impressively mention about the Original books, CDs, etc. that we have brought “to be faithful”. And of course, there is always the final, private opinion of “Fuck it. I am downloading it for free”. I am more interested in an economic analysis, that includes the companies, the consumers and the pirates.
When we talk of Piracy, there are overall 4 categories – Videos (this means movies, series, etc.), music, software (I am including games here) and books. Of course, there are others, but let’s stick with these. The problem arises with law of supply and demand. Let’s take the example of a game. (I am going to use simple nos. here) A company might decide it will sell 100 DVDs. It took the company 100 bucks to make one DVD (the current marginal cost) and it figures it might go for a profit margin of 25%, so it charges 125. Now, I decide that this isn’t worth 125, so I pirate it. I can buy a copy from the black market or download it from the net. Both these options are going to cost me money – let us say that the maximum of these is 25 bucks and the minimum works out to 20 bucks. The numbers are relative (but with the right multipliers, they can start to look highly accurate). I go for the minimum. And the same goes for people round the world with different minimums. The demand curve for the game actually gets split into the forecasted demand, the black market demand and the internet download demand.
What this might imply is that the quantity of production can actually be increased – the marginal cost can go down even further. The reason for this is that the tangible costs associated with 4 piracy stricken items form a low percentage. Labor required in these industries (at least for producing more units of the same – CD, DVD, book, etc.) is very low. Which means that the developer might actually make a 25 % profit selling 10000 DVDs at 30 bucks each – but doesn’t because of the improper demand curve forecasting. There is also the problem of piracy being too entrenched to facilitate shifting over. And finally, there will be a certain percentage of demand which can be met at cheaper costs – looking above, I will still pirate even if the price is 30. But I really would like to see a company take a gamble, work it out and release at pirated or close to pirated costs – be it a book, a movie CD, or software. And such a move is not unprecedented. The cost of original music cassettes (at least in my hometown of Mumbai) were so low in the nineties when I was growing up – that it was cheaper for me to buy them rather than buying a blank cassette and recording the songs myself.
Of course, we can consider opportunity costs – of the item being illegal, or even the opportunity cost of the time it would require to download anything – if there was far more control. Try adding a risk percentage of 20 % to the pirated costs (fines if we get caught) to the original idea of lowering original costs. But we got to understand that it is only if both measures are taken in conjunction that piracy will be rooted out (if that’s the aim). Enforcing rules without lowering prices would result in nothing – People might gladly pay the fine since it would be cheaper on an average. Similarly low prices with fewer crackdowns would still be more expensive than the alternatives. [I do this for local train travels. I have travelled about a thousand times and have been asked for my ticket only 5 times. With a fine of 500 bucks, on an average, this works out to 2.5 bucks per travel. So, economically, it doesn’t make sense for me to buy a ticket if the price is over.]
Then again, I made a basic assumption in this case – that the companies have not taken the splintering of the demand curve into account. Perhaps, economically, they have decided that it makes far more sense for them to keep their official quantity low – their needs are met anyway. After all, the creators – actors, writers, producers, directors, singers, musicians, even game developers – live lives about which they can’t complain about (at least economically). The black market ends up generating employment and income to members of society who, well, can’t be employed in other areas. And of course, we consumers, in any case, don’t complain about the economics of piracy. It then degenerates into a question of whether some societal rules need to be changed at all – kind of like the illegality of drugs or of even corruption. Maybe society as a whole is actually well off – which then makes any anti-piracy law extremely dangerous.