Assessing the Quality of Illegal Copies and its Impact on Revenues and Distribution

Conventional wisdom holds that illegal copies cannibalize legitimate sales, even though previous research has found mixed effects, with illegal copies acting as both a substitute and a complement. The impact of the quality of illegal copies on the legal market remains unclear. Building on product uncertainty and production quality, we propose that higher quality copies benefit (hurt) sales when product uncertainty is higher (lower), during product launch (post-launch). Using motion picture and online piracy data, we estimate piracy quality by applying a latent item response theory (IRT) model based on keyword signals in the illegal copies. An interdependent system jointly estimates movie screens, revenues, downloads, and available illegal copies with piracy quality in both the launch and post-launch periods. We find that at launch, when less information is known about a movie, higher quality illegal copies demonstrate a positive sampling effect on revenues. In the post-launch period, however, higher quality illegal copies exhibit a negative substitution effect on revenues. The findings suggest producers can alleviate product uncertainty through higher quality samples at product launch while diluting piracy quality post-launch.