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This paper finds that unauthorized reproduction of intellectual property in the presence of demand network externalities can not only induce greater firm profits relative to the case where there is no copying, it can lead to a Pareto improvement in social welfare. Ceteris paribus, when network externalities are present, firms have a greater incentive to expand output because marginal revenue is higher and/or they may wish to create preemptive installed bases. This paper suggests that unauthorized copying can be a relatively efficient means of achieving this by allowing the firm, in effect, to 'price discriminate' among different classes of consumers. Copyright 1994 by Blackwell Publishing Ltd.
Lisa N. Takeyama (Wed,) studied this question.