Intellectual Property Rights on Digital Goods and Global Profit Strategy: Rational Choice Approach

This paper analyzes determinants of intellectual property rights on digital goods from the perspective of rational choice. Since digital goods are only partially excludible and very easily distributed over the Internet, the profit maximizing firm seems to choose the optimal rent-seeking investment (e.g lobbying) that is expected to bring the marginal benefit as equivalent as technological investment fetches. The result of our comparative analysis shows that the profit maximizing technological protection level decreases with legal protection level while it increases with more the more portions of illegitimate consumers. It also demonstrates that the profit maximizing intellectual property rights level increases with the more portions of illegitimate consumers and higher product quality, whereas it decreases as the cost of rent-seeking activities (dead weight loss) and technological protection level increases. One implication is that firms producing digital goods should present lower price with higher technological protection to make profit maximization in countries where more consumers illegitimately use copyrighted digital goods. Another implication for intellectual property right is that it is likely to be determined in between the median voter preferred level and the profit maximized level by the associated rational self-interested policy maker.