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.