Abstract

Online rental of software is emerging as a new way of dissemination for several major software firms. Compared to outright selling, the renting scheme delivers the software as a service instead of a physical good. Hence, users cannot privately make copies for resale in the market. We investigate the impact of the renting mechanism on software piracy and pricing in a two-period model whereby a piracy market is present in the second period. We develop and compare models with or without renting. Our analysis shows that renting reduces social welfare but helps to increase a vendor’s profit under certain conditions. We also assess the difference in outcomes in the presence of network effect.

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