You wouldn’t steal a car. You wouldn’t steal a handbag. You wouldn’t steal a mobile phone. You wouldn’t steal a DVD. Buying pirated films is stealing…Piracy: It’s a crime.

Did you happen to catch this mini-flick the last time you rented a DVD from the video store? If you haven’t, chances are you will soon. With seedy sepia images of stacks of DVDs on tables, the messages about stealing and piracy flash on the screen in distorted lettering in an attempt to grab the attention of viewers as few movie trailers ever could. This mini-movie is rated I: Illegal downloading is Inappropriate for All Ages.

Movie makers, along with publishing, software, music and videogame vendors, are putting a lot of creative thought and energy into fighting piracy, which has become more prevalent with the rise of digital products and as a result of the increasing ease of duplication and availability of illegal copies. Trade associations such as the Business/Entertainment Software Alliance, the Recording Industry Association of America and the Motion Picture Association of America have been reporting piracy losses that total $22 billion in non-U.S. markets alone.

The reality, however, is that these so-called digital experience goods, like videos, music CDs and software, are highly successful and popular with consumers. The industries must therefore find cost-effective ways to deal with the issue of piracy. “The knee-jerk reaction to piracy that a lot of people have is to throw in technological mechanisms to protect it. Let’s file a lot of lawsuits,” explains Ramnath K. Chellappa, a visiting associate professor of decision and information analysis at Emory University’s Goizueta Business School. “Extremists at the other end say everything should be free and then nobody will pirate. All these seemed like very extreme approaches to combating piracy. From a business point of view, our goal should not be to eliminate piracy because that is almost a fruitless exercise. But our goal should be to manage piracy as to minimize the losses from it. That was the starting point of my research.”

Chellappa, along with co-author Shivendu Shivendu at the University of Southern California, tackle the piracy issue in their paper “Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets,” which was published in Information Systems Research.  Chellappa, who came to Goizueta from the Marshall School of Business at the University of Southern California where he worked with the movie studios and taught MBA courses in digital product pricing and piracy, set out in his paper to assess how to manage piracy. “We need to acknowledge the fact that some people pirate software and other products to just check them out—not necessarily with the intention of pirating,” explains Chellappa.

The authors develop a model in which they view piracy as a two-stage decision process. In the first stage of piracy behavior, consumers decide between buying, pirating, or not participating in the market. In the second stage, some pirates may choose to discard the copy while some may choose to buy a legitimate one.

Typically, existing literature portrays consumer-buying habits as a single-stage buying process. A consumer buys a pirated good instead of buying the same product legally, and therefore the pirated version is competing directly with the legal version. However, Chellappa and Shivendu suggest that some consumers pirate products like software as a way to test them or figure out how useful they would be. In other words, a consumer’s decision to pirate may not always be final. He or she may pirate a product to try it out and then buy that same product legally. “Some customers may check out the product and then update the fit of the product, meaning they don’t know what the product was worth to them before. Now having fully consumed the product, they know what it is about. They can make a much more informed decision,” notes Chellappa.

The authors learn through their research that piracy losses are more severe for those products that don’t live up to their hype. People are unlikely to buy after pirating and experiencing, for instance, a movie that falls short of expectations. Vendors must therefore invest more in deterring piracy for these products.

Most importantly, because it is feasible to convert some of the consumers who pirate into buyers, Chellappa and Shivendu suggest that vendors can give samples of the product to entice consumers. Sampling, they conclude, is a piracy-mitigating strategy, yet one that is optimal only under narrowly defined circumstances. They study the efficacy of sampling strategies by coming up with an optimal sample size and conditions under which it is beneficial to the vendor. “If indeed pirating leads to some kind of good, then we basically point out that instead of vendors letting the market pirate and understand this, they can proactively give samples of the products,” explains Chellappa.

“While sampling is a well-known concept of a physical product, like if you go to a bakery and taste samples of breads, you can’t go there every day for your breakfast and eat the samples. That is the problem we have with digital products,” observes Chellappa. “If you give the full product, then people can use it for an infinite amount of time. You have to only give a portion of the product as a sample. Then you can sufficiently entice them, but it will also come back. Our model actually finds what portion of the consumption experience should be provided as a sample for these types of digital products that are also experience goods.”

In the end, piracy happens. “If you expend all your energy in stopping piracy, then you will be unsuccessful,” explains Chellappa, who is already collaborating with Goizueta students and professors on further research that explores global piracy and piracy across different products and different countries. “You can not prevent every single person from pirating. There is an optimal investment where you can simultaneously invest the right amount in technology, the right amount in legal actions, the right amount in other techniques like providing samples. There is an optimal investment you need to make in all of these dimensions, not focus on just one.” That is the message for managers. The message for consumers? Piracy: It’s a crime.