Digital Pirates in Practice: Analysis of Market Transactions in Hong Kong's Pirate Software Arcades (2006)

The illegal copying and distribution of computer software, music, and films-known as digital piracy in industry parlance-is becoming an increasing problem around the world. In this paper, we discuss the institutional and operational details of the market for pirate software using first-hand knowledge obtained in Hong Kong's infamous computer arcades. To gain an understanding of this market for use in theoretical, empirical, and policy analysis, this preliminary study sets out the means through which potential consumers of pirate software reveal their demand, and the clever real-time supply chain that allows sellers to respond within an hour to consumer demand while protecting pirate suppliers from the downside risk of criminal prosecution and asset confiscation. 1. Introduction What is a pirate software market and how does it function? How do demanders reveal their preferences to the suppliers of illegally copied software? How do the suppliers of pirate software satisfy their customers' demands while minimizing the risk that their entire capital stock-including the master of the software, the reproduction equipment, and their inventory of pirate copies-will be lost due to seizure by customs officials? We propose to answer these questions and others in this paper. We have undertaken the field work reported in this paper to fill a gap in our understanding of how the market for pirate software actually functions. Markets for pirate software, like all other black markets, are inherently difficult to study due the illicit nature of the transactions. For this reason, direct quantification of the industry is difficult and researchers must resort to more indirect methods. For example, Moores and Dhillon (2000) conducted a survey in Hong Kong to examine the demand-side factors that are related to software piracy. Harvey and Walls (2003a, 2003b) employed the methodology of experimental economics in a series of papers that quantify the demand for pirated software in laboratory experiments conducted in Hong Kong and in Las Vegas. Digital piracy may depend on more than a simple cost-benefit calculation. For example, piracy is often not seen as theft on the part of the consumers of pirate software, and even when it is viewed as theft it is sometimes viewed as striking a blow against ever-encroaching U.S. economic and cultural imperialism, or at the very least, 'stealing' from the rich (Crawford, 2000, p. 11). Limayem, Khalifa, and Chin (1999) found in a study of Canadian university students that social factors significantly affected the propensity to illegally copy software. Their survey results are confirmed by the empirical analysis of Shin, Gopal, Saunders, and Whinston (2004) who find that cross-country variation in rates of software piracy are directly related to the degree of social collectivism. Little research has focused on the supply side of digital piracy. A few studies have examined internet-based piracy of movies, such as the Byers et al. study of digital piracy focusing on the source of supply of movies posted on the internet, and the Kwok (2004) study of movie piracy on file-sharing networks. But for the most part, prior research has examined the demand side-either purchased on a black market or self-pirated-but researchers have not systematically examined the supply of pirate software. In particular, no prior research has examined the actual supply chain of a business enterprise selling pirate software. This paper presents an analysis of the actual operation of the market for pirate software in Hong Kong. The purpose of the analysis is to increase our understanding of how such illicit markets actually function. The paper continues by taking a street-level view of the logistics of digital piracy. 2. Demand Revelation Sellers of pirate software face a different demand revelation mechanism than to the developers of original software. The original developers invest substantial resources in research and development of new products, but do not know what the demand for the final product will be until it is released. …