Bundling of Digital Goods in the Presence of Piracy

Abstract

The efficacy of bundling is well-known in the context of digital goods with zero marginal cost. However, digital goods are also prone to piracy, and it is not clear what impact piracy might have on the efficacy of bundling. Prior research on this issue is limited, and it suggests that the appeal of bundling remains intact in the face of piracy. Using a model that recasts the classic bundling problem in the backdrop of piracy, we question this insight and show that piracy can severely diminish the appeal of bundling. In fact, bundling exacerbates the piracy problem and pushes more consumers to substitute the legal products with illegal ones, which more than offsets the usual benefits of bundling to a monopolist seller. Overall, the manufacturers of digital goods need to take piracy into consideration in their bundling decision and, perhaps, refrain from bundling when they anticipate the threat of piracy to be severe.