Atanu Lahiri

Effects of Piracy on Quality of Information Goods

It is commonly believed that piracy of information goods leads to lower profits, which translate to lower incentives to invest in innovation and eventually to lower-quality products. Manufacturers, policy makers, and researchers all claim that inadequate piracy enforcement efforts translate to lower investments in product development. However, we find many practical examples that contradict this claim. Therefore, to examine this claim more carefully, we develop a rigorous economic model of the manufacturers quality decision problem in the presence of piracy. We consider a monopolist who does not have any marginal costs but has a product development cost quadratic in the quality level produced. The monopolist faces a consumer market heterogeneous in its preference for quality and offers a quality level that maximizes its profit. We also allow for the possibility that the manufacturer may use versioning to counter piracy. We unexpectedly find that in certain situations, lower piracy enforcement increases the monopolists incentive to invest in quality. We explain the reasons and welfare implications of our findings. This paper was accepted by Lorin Hitt, information systems.

Consumer Learning and Time-locked Trials of Software Products

Manufacturers of information goods often offer free trial versions of their products. Information goods are experience goods, and trials often promote consumer learning with respect to quality. However, the downside of this strategy is that trials may cannibalize sales in the after-trial period. Recent research in information systems has identified this trade-off but has stopped short of comprehensively analyzing it. As a result, it has drawn unexpected and unrealistic conclusions, such as that offering a free time-locked trial of the fully functional version is optimal for “any” information good that does not exhibit significant network effects. We show that, when this trade-off is considered, a time-locked trial may not be optimal even in situations in which there is no network effect and the overall impact on consumers’ valuations is positive. With a simple model, we characterize the conditions necessary for optimality and explain their implications. The main insight is that, unless learning effects are appropriately incorporated in the analysis, there is a risk of overestimating the benefits of free trials. Using extensions to the basic model, we find that this insight is quite robust and applies to a wider context.

Hacker Behavior, Network Effects, and the Security Software Market

The market for security software has witnessed an unprecedented growth in recent years. A closer examination of this market reveals certain idiosyncrasies that are not observed in a traditional market. For example, it is a highly competitive market with over 80 vendors. Yet the market coverage is relatively low. Prior research has not attempted to explain what makes this market so different. In this paper, we develop an economic model to find possible answers to this question. Our model uses existing classification of different types of attacks and models their resulting network effects. We find that the negative network effect from indirect attacks, which is further enhanced by value-based targeted attacks, provides a possible explanation for the unique structure of this market. Overall, our results highlight the unique nature of the security software market, furnish rigorous arguments for several counterintuitive observations in the real world, and provide managerial insights for vendors on market competition.

Quality competition and market segmentation in the security software market

In recent years, we have witnessed an unprecedented growth in the security software market. This market is now fiercely competitive with hundreds of nearly identical products; yet, the price is high and coverage low. Although recent research has examined such idiosyncrasies and found the existence of a negative network effect as a possible explanation, several important questions still remain: (1) What possibly discourages product differentiation in such a competitive market? (2) Why is versioning absent here? (3) How does the presence of free alternatives in this market impact its structure? We develop a comprehensive oligopoly model, with endogenous quality and versioning decisions, to address these issues. Our analyses reveal that, although the presence of numerous competitors leads to a greater need to differentiate, the network effect in this market works as a counterweight, incentivizing vendors to sacrifice differentiation in favor of collocating in the top end of the quality spectrum. We explain the reasons and implications of this important finding. We further show that this result is robust and applicable even when versioning by competing vendors or the presence of free software is taken into consideration. Furthermore, given that the presence of free software actually intensifies competitive pressure and heightens the need to differentiate, the role of the network effect in abating differentiation becomes even more discernible.

Information Hang-overs in Healthcare Service Systems

The literature on business process design has focused on issues such as bottlenecks, workflow configuration (series versus parallel), replacing an existing workflow with a shorter one, etc. One important issue that has not received adequate attention is the information-intensive nature of medical service systems. Performance of clinical workflows depends not only on how various steps are carried out but also on when certain information items are collected. We report the results of a long-term empirical study that looked at the implementation of a radiology information system (RIS) at a large regional network of radiology clinics. We find that a failure to gather necessary clinical background information in earlier steps significantly delays later steps and causes them to hang over, with a significant impact on the total turnaround time of diagnostic reports. We show that information systems can solve this problem by separating the task of gathering information from its usage and relocating that task upstream in the workflow. We argue that such unbundling can lead to shorter report turnaround times even if it significantly increases the utilization of the bottleneck server. These results have broader implications for the optimal design of other clinical workflows, such as the process of filling prescriptions in pharmacies or the typical surgical preanesthesia evaluation in hospitals. Finally, we explain why the impact of addressing hang-over is often nonuniform across clinical modalities, providers, and patient types.

Revisiting the incentive to tolerate illegal distribution of software products

Motivated by the recent strategy switch of a large software producer, this paper revisits the trade-offs associated with tolerating illegal distribution of software products. Conventional wisdom is that a higher level of positive network effects justifies a tolerant approach on the part of software producers-because illegal distribution leads to more users, amplifies positive network effects, and creates a greater demand for the legal version. I show that this wisdom does not hold in the context of supporting illegal versions with patches. Patches are used for plugging security vulnerabilities as well as for distributing functionality changes. Software producers have the option of supporting illegal versions with either or both kinds of patches. I find that, even in the presence of strong positive network effects, the least tolerant approach of denying illegal versions both kinds of patches can be optimal.

Pricing of Wireless Services: Service Pricing vs. Traffic Pricing

As the ability to measure technology resource usage gets easier with increased connectivity, the question whether a technology resource should be priced by the amount of the resource used or by the particular use of the resource has become increasingly important. We examine this issue in the context of pricing of wireless services: should the price be based on the service, e.g., voice, multimedia messages, short messages, or should it be based on the traffic generated? Many consumer advocates oppose discriminatory pricing across services believing that it enriches carriers at the expense of consumers. The opposition to discrimination has grown significantly, and it has even prompted the United States Congress to question executives of some of the biggest carriers. With this ongoing debate on discrimination in mind, we compare two pricing regimes here. One regime, namely service pricing, involves pricing different services differently. The other one, namely traffic pricing, involves pricing the traffic (i.e., bytes) transmitted. We show why the common wisdom, that discriminatory pricing across services increases profits and harms consumers, may not always hold. We also show that such discrimination can increase social welfare.

The Disruptive Effect of Open Platforms on Markets for Wireless Services

Application-based pricing is common in telecommunications. Wireless carriers charge consumers more per byte of traffic for text messages than they do for wireless surfing or voice calls. Such pricing is possible because carriers and handset manufacturers have the ability to tag and meter each application. While tagging and metering are possible in the case of closed platforms such as iPhone, they are not in the case of open platforms such as Android. Android is open source with open application programming interfaces, and anyone can develop applications for it. Because the carriers have little control over applications, Android is inherently disruptive of differential pricing across applications. Users and neutrality advocates support Android, believing that it can increase consumer surplus by disrupting differential pricing. However, we show that the equilibrium under differential pricing is different from the equilibrium under open platforms, and it is particularly so with regard to the sets of consumers served and the quantities consumed. With open platforms, certain consumers are either not served or they are served a quantity that is less than what they would be served under differential pricing. Consequently, the consumer surplus and the social surplus are often lower with open platforms. Similarly, firms are expected to prefer differential pricing. We show that this expectation is also not true under certain circumstances in which open platforms and neutral pricing work like a quasi-bundle.

Revisiting the Incentive to Tolerate Illegal Distribution of Software Products

Motivated by the recent strategy switch of a large software producer, this paper revisits the tradeoffs associated with tolerating illegal distribution of software products. Conventional wisdom is that a higher level of positive network effects justifies a tolerant approach on the part of software producers - because illegal distribution leads to more users, amplifies positive network effects, and creates a greater demand for the legal version. I show that this wisdom does not hold in the context of supporting illegal versions with patches. Patches are used for plugging security vulnerabilities as well as for distributing functionality changes. Software producers have the option of supporting illegal versions with either or both kinds of patches. I find that a higher level of positive network effects surprisingly requires the least tolerant approach of denying illegal versions both kinds of patches.

Optimal Policies for Security Patch Management

Effective patch management is critical to ensure the security of information systems that modern organizations count on today. Facing numerous patch releases from vendors, an information technology IT manager must weigh the costs of frequent patching against the security risks that can arise from delays in patch application. To this end, we develop a rigorous quantitative framework to analyze and compare several patching policies that are of practical interest. Our analyses of pure policies-policies that rely on a single metric such as elapsed time or patch severity level-show that certain policies are never optimal and no single policy may fit all information systems uniformly well. Depending on the context parameters, particularly the setup and business disruption costs for patching, either a time-based approach or an approach based on the cumulative severity level may be effective. To develop a more complete guideline for policy selection, we decipher hybrid policies that combine multiple metrics. Finally, we conduct extensive numerical experiments to verify the robustness of our analytical results. Overall, our paper establishes a comprehensive framework for analyzing various patching policies and furnishes useful insights for IT managers.