By Stan Liebowitz, an economics professor at the University of Texas at Dallas
Andrew Popper, in his insightful paper on problems and remedies of software theft, focuses on an aspect of theft that is not often considered. Instead of considering the theft of final consumer goods, he focuses on the theft of intermediate goods used in the production of other goods. The thieves in this case are companies, not individuals, and they produce products using stolen software, giving themselves an advantage over their more honest competitors.
Theft is normally considered harmful to society for several reasons. Most importantly, if theft is allowed to become common, the linkage between effort and reward is weakened for law abiding citizens, thus reducing or eliminating incentives for individuals to provide the efforts to be productive. If the neighborhood thug is capable of taking all the fruits of your labors, you lose an incentive to labor. It is also the case that individuals and governments spend resources trying to reduce theft (so that individuals will have incentives to work) and these are resources that could have been used for other more productive purposes if not for theft.
The economic model of competition provides clear predictions of how competition would work for firms within an industry when this type of theft is permitted. In the short run, the low cost producers (using pirated software) will earn higher profits than the high cost producers. In the longer run, the low cost producers will drive the high cost producers out of business.
Normally, we want more efficient firms to drive out the less efficient firms because that lowers the cost of the product and lowers prices for consumers. There is another, probably more important reason to want the more efficient firms to prevail, although this is often left out of the simplistic economic models of competition. The expectation is that the current lower cost firms are generally the better and more capable firms, and thus as conditions change over time, the fitter firms are likely to better handle these changes. This is the same reason that sports teams try to pick the players with the best statistics — because the expectation is that the players who have been above average will stay above average during their productive careers.
Similar economic reasoning leads to a conclusion that it is important to have a level playing field in markets. Not because it is fair, although there may be a separate value in fairness, but because level playing fields lead to the correct choice of the most efficient firms, leading to continued innovations and cost reductions.
But these results need to be recast when the low cost firms are not the most efficient, but instead are just the more dishonest firms. Because there is no reason to believe that dishonest firms are more efficient than honest firms, it is likely that efficient firms will be driven out of business by pirates. If the legal system of a country allows dishonest firms to gain an advantage over honest firms, then the competition between firms will tend to lead to a race to the bottom where the only firms left are dishonest and not particularly good at producing the products they are selling.
In such a world, the producers of intermediate goods (i.e., software) suffer directly from the theft of their products. With sufficient theft we would expect the producers of these goods to either stop spending resources improving their products or else to go out of business, leading to a lowering the quality of the intermediate producer good from what it would have been without piracy. Over time, this will lead to a degradation of the quality and cost effectiveness of final consumer goods from what they would have been had innovation in the production of the producer goods (the software) continued.
For example, if the producers of cell phones could used pirated microprocessor designs without paying anything to the creators of those designs, and if they could use clones of patented high resolution displays without paying anything to those who have researched methods to produce higher resolutions, and if they could copy operating systems without paying anything to creators of operating systems, then the cell phones that consumers use would stop improving because no one would have an incentive to innovate. The phones would be cheap but primitive.
Unfortunately, the general population is likely to see only the short term benefits of lower priced products when they purchase from a firm using stolen software. [As an aside, I believe Popper has mischaracterized Chicago antitrust as also being narrowly focused on short term prices.] It is more difficult to see the long term harm from allowing less fit firms to succeed, but the idea of a ‘level playing field’ is something can be fairly easily understood.
Fortunately, Popper’s paper explains the problem and discusses solutions. Let’s hope our politicians incorporate the paper’s insights and try to work to make our economy more efficient, productive, and as a by-product, more honest.