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different welfare effects. Society prefers the publisher to manage piracy through lower
prices rather than increased enforcement. Lower prices allow more people to use
software, which in turn increase consumer surplus and welfare. Second, a tax on the
copying medium is welfare superior to a penalty for copyright violations. Compared to
the penalty, the tax has less effect on the legitimate price and leads the publisher to reduce


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194 Poddar


rather than raise spending on detection. Reducing spending on detection always has a
positive effect on welfare, since the cost of detection is somewhat wasteful. Lastly, it is
optimal to subsidize legitimate purchases. Here also subsidy leads to reduced spending
on detection. On the other hand, it is generally true that the government policies that
focus only on penalties will never be an optimal choice from society™s welfare point of
view. So the other policy instruments available turn out to be crucial in enhancing
society™s overall welfare under the existence of software piracy.




Contribution of the Study to
Researchers/Instructors and
Managers/Entrepreneurs

Academic Purpose for Researchers and Instructors

Up until now, the literature on the economics of software piracy is scattered in various
directions and sometimes even with several conflicting results. This chapter puts an
order to this scattered literature and connects one research agenda with the other. It
explains why some results are in conflict with other results. In doing so, the study
provides an in-depth analysis of certain important issues raised in the literature of
software piracy. We believe the chapter will be a useful guide to an academic researcher
as well as to the instructor who plans to teach a course on the economics of software
piracy. Further readings on the issue of software piracy are listed in the bibliography.


Business Purpose for Managers and Entrepreneurs

We also believe this study will give some new insights to the business practitioners who
are involved in the software industry. Every year software piracy is costing billions of
dollars to the industry. So the conventional wisdom would suggest to stop piracy at any
cost to save the industry. But at the same time, the legal software products are almost
beyond the purchasing capability of the average software users in the developing world.
So piracy remains the only way out in those regions. It is also true that easy availability
of the software products in a developing country™s markets increases the know-how and
the usage of software products. This in turn helps the software companies to sell their
products in those markets more successfully. When the scenario is like this, it is
important to the managers and entrepreneurs in the industry to come up with innovative
business strategies, which are feasible as well as profitable. We believe this study will
help them to formulate such business strategies.
Another issue is that in the present business world, e-business and e-commerce are
gradually taking the center stage, and it is needless to say that the behaviour of the
software industry will have a profound effect on them as well. Managers and entrepre-



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On Software Piracy 195


neurs will try to understand this impact in great detail in order to find profitable business
solutions. The analysis done in this chapter will be a good starting point to see how the
software industry behaviour and industry growth are actually going to affect e-business
and e-commerce over time.




Concluding Thoughts
In this chapter, we argued that the presence of consumer network externality cannot be
generally held as the prime reason for piracy in all situations. We emphasize the fact that
whether network externality can be a possible reason for allowing piracy by the original
producer depends on the market structure, demand environment and the nature of
competition. We also identify that the policy recommendations on the issue of software
piracy could be very complicated, and in many cases, the effect on overall welfare is
ambiguous. We believe one policy recommendation that is unambiguous is: the
government™s incentive to enforce laws against piracy increases with the size of the
domestic software industry. In other words, this means, for small and developing
domestic software industries, allowing limited piracy does give a solid impetus for a rapid
development of the domestic software market in terms of usage and know-how. In order
to facilitate this, the growth of the industry attaining a critical market size is absolutely
essential. But this stance usually changes, once the domestic software industry becomes
relatively developed. Then to foster new innovations and in order to keep a steady
growth of the industry, a strong copyright protection law is vital. It clearly appears that
piracy can have positive social effects in the short run, provided it does not provoke a
market breakdown. In the long run, piracy is unambiguously detrimental because it limits
the potential development of new products by software sellers.
Lastly, we would like to point out that there are certain limitations with the models that
we described in this chapter. We always assumed stopping piracy is costless to the
original firm, but in reality this may not be the case. Actually, in most of the cases, it is
not a costless operation. To stop piracy or at least to limit the activity of the pirate, the
original developer has to do something which is costly. For example, to stop piracy, the
original firm may wish to set up an operation in order to monitor the market for piracy.
Now this is definitely a costly operation, which has to be borne by the original firm in order
to check the pirate. In general, monitoring also raises the cost of piracy to the pirate mainly
because if the pirate gets caught, he or she has to pay some kind of penalty. One can
capture this notion by assuming that the pirate™s cost of producing a copy increases with
the monitoring effort of the original developer. So higher the monitoring level, higher the
cost of producing pirated copies. Hence, overall piracy becomes costly with the degree
of monitoring arrangement made by the original firm. Secondly, instead of monitoring
or in addition to monitoring, the original firm can invest in R & D, so that it can develop
a technology (like putting a protective chip inside the software), which increases the cost
of copying the software. Now to develop such technology, costly R&D must be
undertaken before. So the idea is that the original firm can increase the cost of the pirate™s




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196 Poddar


activity by investing in something before the pirate starts it operation. Since the
investment is costly, the question that naturally arises is whether the original firm will
actually undertake such operation or not. And if it undertakes such operation, under what
circumstances it will be effective? We believe these are some important issues that need
a great deal of attention. For future research in this area, this would be a good starting
point.




Endnotes
*
First of all, I would like to thank the editor of the book, Dr. H. S. Kehal for the
encouragement and giving me the support to write this chapter and anonymous
reviewers for the most helpful comments. I also thank the seminar participants at
the Department of Economics at NUS, and the conference participants at Australian
Economic Society Meeting (2002) in Adelaide for useful helpful comments and
suggestions. All possible remaining errors are mine.
This chapter is a part of the research work done under the research project titled
“Economics of Software Piracy” (2002). Financial support from NUS in the form of
research grant (R-122-000-040-112) for the project is gratefully acknowledged.
1
With advanced and sophisticated technological methods, pirated software copies
or even copies of copies become almost if not perfectly identical to an original one.
2
In Vietnam only 5% software is legitimate; while in U.S. 23% software is pirated
(Source: BSA 2003).
3
Benchmark levels vary from country to country and from one software category to
another. For PC business software, benchmark levels of 23% (the rate currently
experienced in the U.S.) were used for most countries, and a rate of 0% was used
for the United States.
4
The idea of network externality stems from the work of Katz and Shapiro (1985). See
also Rohlfs (1974), Gandal (1994) and Shy (1996). Generally, the idea is that the
utility that a given user derives from some products depends upon the number of
other users who consume the same products. In other words, consumers™ prefer-
ences are said to exhibit network externality if the utility of each consumer increases
with the cumulative number of other consumers purchasing the same brand. When
this is the case, each additional purchase raises the value to existing users as well
as the expected value to future adopters. A classic example of a product that
exhibits such a characteristic is found in the telephone network.
5
We would like to emphasize that in this study we do not deal with network security
issues or any such technical matter.
6
Presumably, the original developer had incurred some fixed cost (like R&D to
develop the software) which is sunk now. The cost of making a copy of the software
is negligible.




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On Software Piracy 197

7
q X “ PP = q (X “ P P) + (1 - q)(-PP). If the pirated software is not working, consumer
does not derive any benefit from the software and instead only incurs a loss
equivalent to the amount paid for the pirated software.
8
In most market pirates operate using some makeshift arrangement. If the pirated
software turns out to be a defect product, there is no chance of getting software
replaced.
9
The effects of installing protection into software in the market for software as well
as monitoring piracy have been analyzed in Chen and Png (2003) and Banerjee
(2003) among others.
10
Using notation “NP” in the subscript for no piracy.
Network effect is bounded by ½; because θ = ½ is enough to serve the full market
11

under monopoly.
12
Since the consumer buys original software, he gets to enjoy the benefit X and the
network externality generated by those who also buy original software with
certainty. However, he only gets to enjoy the network created by those who buy
pirated software with probability q, since only there is only a q chance that it works.
13
Since this consumer buys pirated software, he gets to enjoy the benefit and the
network effect created by both legal and illegal users if and only if his software
works.
14
Although, recently King and Lampe (2002) argued that allowing piracy cannot raise
profits if the monopoly producer itself can directly price discriminate between
potential consumers who pirate and other consumers who buy original product.
15
Retail piracy is more prevalent in the poor and developing countries, where the laws
against piracy or in general copyright violations are rather weak, and sometimes
even more difficult to enforce because of corruptions.




References
Banerjee, D. S. (2003). Software Piracy: A Strategic Analysis and Policy Instruments.
International Journal of industrial Organization, 21(1), 97-127.
Chen, Y, and Png, I. (2003). Information Goods Pricing and Copyright Enforcement:
Welfare Analysis. Information Systems Research, 14(1), 107-123.
Conner, K.R., and Rumelt, R.P. (1991). Software Piracy: An Analysis of Protection
Strategies. Management Science, 37(2), 125-139.
Gandal, N. (1994). Hedonic Price Indexes for Spreadsheets and an Empirical Test of
Network Externalities Hypothesis. Rand Journal of Economics, 25, 160-170.
Katz, M. and Shapiro, C. (1985). Network Externalities, Competition and Compatibility.
American Economic Review, 75(2), 424-440.
King, P. S. and Lampe, R. (2002). Network Externalities, Price Discrimination and
Profitable Piracy. Mimeo: University of Melbourne.


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permission of Idea Group Inc. is prohibited.
198 Poddar


PricewaterhouseCoopers for Business Software Alliance. (1998). Contributions of the
Packaged Software Industry to the Global Economy. Washington, D.C.
Rohlfs, J. (1974). A Theory of Interdependent Demand for a Communication Service. Bell
Journal of Economics, 8, 16-37.
Shy, O. (1995). Industrial Organization: Theory and Applications. Cambridge: MIT
Press.
Shy, O. and Thisse, J. F. (1999). A Strategic Approach to Software Protection. Journal
of Economics and Management Science, 8(2), 163-190.
Slive, J. and Bernhardt, D. (1998). Pirated for profit. Canadian Journal of Economics,
31(4), 886-899.
Takeyama, L. N. (1994). The Welfare Implications of Unauthorized Reproduction of
Intellectual Property in the Presence of Demand Network Externalities. Journal of
Industrial Economics, 2, 155-165.
Takeyama, L.N. (1997). The Intertemporal Consequences of Unauthorized Reproduction
of Intellectual Property. Journal of Law and Economics, 40(2), 511-522.




Internet Sources
1998, 2000, 2002, 2003 Global Software Piracy Report. Retrieved from the World Wide
Web: http://www.bsa.org.




Further Readings on Software Piracy
Low, L. (2000). Economics of Information Technology and the Media. Singapore, New
Jersey, London, Hong Kong: Singapore University Press and World Scientific
Publishing Co. Pte. Ltd.
Mowery, D. C. (1996). The International Computer Software Industry. New York and
Oxford: Oxford University Press.
Poddar, S. (2002). “Economics of Software Piracy” “ Project Report 2002. NUS. (Project
supported by NUS research grant R-122-000-040112.)
Steven C., Jr. (2002). Copycat: The Effects of Software Piracy on the Global Economy.
Retrieved from the World Wide Web: http://www.stanford.edu/class/e297c/new/
trade_environment/growing_pains/schew.htm.
Watt, R. (2000). Copyright And Economic Theory: Friends or Foes? Northampton, MA:
Edward Elgar.




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On Software Piracy 199


Readings in Game Theory
Fudenberg, D. and Tirole, J. (1991). Game Theory. Cambridge, MA: MIT Press.
Gibbons, R. (1992). A Primer in Game Theory. NewYork: Harvester Wheatsheaf.
Rasmusen, E. (1994). Games and Information: An Introduction to Game Theory. (2nd
Edition) Oxford: Blackwell.
Romp, G. (1997). Game Theory: Introduction and Applications. Oxford: Oxford Univer-
sity Press.




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200 Brunn




Chapter X



An E-Classification
of the World™s
Capital Cities:
URL References to
Web Sites
Stanley D. Brunn
University of Kentucky, USA




Abstract
The world™s capital cities perform various political functions for their populations,
contain embassies, consulates, and missions of other governments, and serve as
headquarters for major corporations, cultural, and humanitarian organizations.
While social scientists have classified major cities based on population size, number
of corporate headquarters, banks, and airline connections, the emergence of ICTs
suggests additional criteria. I use the number of URL references to Web sites listed in
the Google search engine for 199 world capitals and classify them into five distinct
categories. Small, prosperous city-states and major capitals in Western Europe and
North America have the most hyperlinks. The fewest are for capitals in poor, rural Sub-
Saharan Africa and Southeast Asia. Capitals with multiple government offices, strong
ICT economies and dominant tourist economies have the most hyperlinks per capita.
These are mostly in wealthy Europe and North America. The lowest values are among
African and Asian capitals in poor countries and those with repressive regimes. Major
news items, embassy, financial, and tourism information are major themes on web
pages. Additional research topics are suggested.



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An E-Classification of the World™s Capital Cities 201


The emerging worlds of digital economies or e-commerce present challenges and
opportunities for scholars in the social and policy sciences who are interested in the
information that is available about individual cities and their linkages with other cities
in a region (Brunn, 2003b). Valuable and insightful contributions into these new worlds
of geography, economics, management, sociology, and politics have come from scholars
in a number of fields including geography (Geographical Review, 1997; Janelle and
Hodge, 2000; Wilson and Corey, 2000; Leinbach and Brunn, 2001; Tijdschrift voor
Economische en Sociale Geografie, 2002; Environment and Planning A, 2003), sociol-
ogy (Barnett, 2001; Castells, 2001; Hargittai and Centeno, 2001; Kick and Davis, 2001;
Sassen, 2001), organizational science and management (Sacks, Ventresca and Uzzi, 2001).
Cities, urban regions, and networks have also been a focus of disciplinary and interdis-
ciplinary research initiatives (Castells, 2002; Van der Wusten, 2002). Among the topics
addressed are telecommunications and the changing structures of cities (Graham and
Marvin, 1996; Wheeler, Aoyama and Warf, 2000; Brunn and Ghose, 2003), the changing
geographies of the Internet (Zook, 2001; Kellerman, 2002), the most and least linked
regions (Saad, House and Brunn, 2002), the changing infrastructure of international
Internet-based cities (Townsend, 2001), the changing dynamics of airline networks
(Smith and Timberlake, 2001), and salient features of globally networked cities (GaWC
Study and Network).
One feature of the contemporary urban world that has not been investigated to date is
a classification of the world™s capital cities, in particular, based on how much and what
kinds of information are available using major search engines. Classifying the world™s
largest cities or urban areas has long been of interest among social scientists, including
geographers, sociologists, and economists, because of their political, economic, and
cultural significance. One of the major themes has been classifying world or global cities
by using a number of indices, including population sizes, international sports venues,
number of major corporations, head offices of major banks, stock agencies, advertising
agencies, airline passengers, networks and freight volume, and cultural events (Brunn,
Williams and Zeigler, 2003; Friedman, 1986, 1995; Short et al., 1995; Short and Kim, 1999;
Knox, 1994; Knox and Taylor, 1995; Knox and Pinch, 2000; Hall 1966, 1984, 2001; Lo and
Marcotullio, 2001; GaWC Study and Network; Smith and Timberlake, 2001; Wagenaar,
Mamadouh and Dijkink, 2000). These studies are valuable in suggesting subsequent
studies on specific types of cities or city systems using new databases and perspectives.




National Capitals
National capitals represent a major category of important cities. They are not only
significant political, economic, and cultural nodes for the state in which they are located,
but they are also significant for the roles they play and influences they have elsewhere.
Capital cities are networked to rural areas and small towns within their state, as well as
the major centers of commerce, industry, research and development, and learning. As
the major administrative center for the country™s central government, the capital city is
the place where national decisions are made regarding the lives of those within its



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202 Brunn


borders, including educational funding and the content of school curricula, economic
development initiatives, social welfare policy, and environmental regulations. Capital
cities often are the sites of not only the executive branches of the national government,
but the national legislative chambers, the highest courts, and military/defense and law
enforcement offices, as well. Many national capitals also are places where the embassies,
consulates, and missions of other countries are located as well as the headquarters for
IGOs and NGOs. Thus capital cities, in short, perform a variety of functions and roles,
not just to those living within its borders, but also to those in neighboring states, and
those in distant states.




Classifying a National Capital™s
Importance
Missing from the disciplinary and interdisciplinary literature on city functions are
examinations into the amounts and varieties of data from electronic databases that are
available about individual cities within a country, the world™s largest cities, and specific
types of cities. The latter would include capital cities, major university cities, medical

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