Let the Pirates Patch? An Economic Analysis of Software Security Patch Restrictions

• Published in: Information systems research 2008-03, Vol.19 (1), p.48-70
• Main Authors: August, Terrence, Tunca, Tunay I
• Format: Article
• Language: English
• Subjects: Alliances; Communications software; Computer software; Computer software industry; Consumer economics; Consumer equilibrium; Economic research; economics of IS; Enforcement; Financial market structures; Information technology; IT policy and management; IT security; Licensing; network economics; Network security; Piracy; Pirates; Product enhancement; Restrictions; Social welfare; Software packages; Software piracy; Studies; Vendors
• ISSN: 1047-7047; 1526-5536
• DOI: 10.1287/isre.1070.0142

We study the question of whether a software vendor should allow users of unlicensed (pirated) copies of a software product to apply security patches. We present a joint model of network software security and software piracy and contrast two policies that a software vendor can enforce: (i) restriction of security patches only to legitimate users or (ii) provision of access to security patches to all users whether their copies are licensed or not. We find that when the software security risk is high and the piracy enforcement level is low, or when tendency for piracy in the consumer population is high, it is optimal for the vendor to restrict unlicensed users from applying security patches. When piracy tendency in the consumer population is low, applying software security patch restrictions is optimal for the vendor only when the piracy enforcement level is high. If patching costs are sufficiently low, however, an unrestricted patch release policy maximizes vendor profits. We also show that the vendor can use security patch restrictions as a substitute to investment in software security, and this effect can significantly reduce welfare. Furthermore, in certain cases, increased piracy enforcement levels can actually hurt vendor profits. We also show that governments can increase social surplus and intellectual property protection simultaneously by increasing piracy enforcement and utilizing the strategic interaction of piracy patch restrictions and network security. Finally, we demonstrate that, although unrestricted patching can maximize welfare when the piracy enforcement level is low, contrary to what one might expect, when the piracy enforcement level is high, restricting security patches only to licensed users can be socially optimal.