A simple change in market structure could net millions for the University and provide fans infinitely more excitement. Currently, the school charges the same price for every game. But as anyone who has every tried to buy a ticket from a scalper, not all games have equal value. Charging more for games against marquee opponents would give the school incentive to schedule tougher non-conference opponents.

To start of with, let us define theft. The commonly accepted definition is “the taking of someone else’s property without their consent“. The two keywords that need to be looked at here are “taking” and “consent”. I am going to demonstrate in various different ways why software piracy does not come into the same category as theft. My first argument is with the word “take”.

First of all, the word “taken,” as it was originally used, was meant to imply that what you take is no longer there with the owner. In fact, the root of the word piracy itself betrays what it is supposed to mean. Pirates stormed ships forcibly, looted the occupants (not to mention murdered and God knows what else), and took away things that left the original owners without them.

This clearly doesn’t apply to piracy of music CD’s and software. If I download a song from a server, then the original copy is intact and nothing has been lost. To put a different spin on it, if I light a candle, and you (without my consent) light another candle from my flame and run away, can I charge you with having stolen my light? Is that piracy? I don’t think so.

Of course, all software companies and music companies have the right to make it as difficult as possible for people to copy and run their software. Which brings me to my second point as to why I don’t consider piracy as theft.

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I quite understand the meaning of the term opportunity cost. The primary gripe with piracy is that it causes lost sales. This assumption is dubious at best or remarkably overstated. For this argument to ring true, the assumption must be made that if a user illegaly downloads a song, he or she would have purchased it. If the user never intended to purchase the song, then downloading the song illegally has not caused any sort of lost sales.

In fact, this is much more often true than not. The overwhelming majority of people who illegally download software would never have bought it if they were unable to get if for free. So this argument falls flat.

My final argument is an extension of my earlier article on how to charge different prices for your products. Companies usually adopt pricing policies that confer an additional benefit to those who pay high prices. For example, business class passengers in airplanes have shorter lines. Conversely, they make it difficult for customers who are price sensitive and want to save money to ensure that only those who are willing to make some sort of a sacrifice can get the lower priced products. The example is that of discount coupons which force customers to go through all the hassle of cutting out and saving useless bits of paper in order to get a discount.

Piracy can be looked at in this light. It is never easy to download something illegally. You have to find a source, try and crack it, are in constant fear that updates will change something and render the software useless, etc. This is the reason why people pay money for software. They do it to avoid hassles. The very fact that people choose to buy software instead of trying to get it for free demonstrates this. The end result is this: People who would never have bought the software anyway are the ones who usually try and download music and software illegally. The others buy it to avoid the hassles of using non-genuine software.

The fact that people are still buying music and paying for software illustrates this principle. They pay for software even though they can get it for free. As long as companies make it as difficult as possible for their software to be copied illegally (it doesn’t have to be impossible), they will not lose sales since those to whom the software is worth the price will purchase it.

A lot of people of course, have different points of view on this, believe that you should go to an online store and purchase software, and they are most welcome to share with our readers why they feel that piracy is theft or provide further reasons as to why it is not.

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As an impartial observer, I’ve often wondered why, when I go to a restaurant in a group and order a dish, do they bring my order along with everyone else’s, and then serve my food that I ordered to everyone on the table! For example, if I order six dumplings, and there are six people in the group, the waiter will casually give each person a dumpling, and I get only one. Whereas I ordered six thinking that I would eat all of them. As a result, my hunger is not satiated.

Also, if I want to eat well, I must have the dishes that others have ordered which I may not like. My wife says that this is good etiquette, and that my not understanding this simple fact highlights my lack of social graces. As a person with a suspicious mind however (and a game theory one at that!), I have a different take on the issue.

When a group goes to a restaurant, either they all share the bill equally or each pays for themselves. It is considered less awkward and simpler if the group (all things being equal), split the bill equally. This means that as an individual, when I want to order something on the menu, the price of whatever I order drops proportionately to the number of people on the table. For example, if an item I want (say king prawns) costs $50, then I will only have to pay $10 if my group has five people.

Now I have no control whatsoever on what other people order. By not ordering anything expensive, I can’t guarantee that others will do the same. Therefore, it is in my best interests to order everything I want without looking at the price since I will never again get an 80% discount! True, others may share my meal, but in an expensive restaurant, you’re usually not paying for the raw materials of the food itself but for the ambiance, the nicely dressed waiters, etc.

Image Credit: Matt and Kim Rudge

Since we assume that each person in the group is rational and is thinking just like me, they will order expensive things too, and so the total bill turns out to be extremely high. A variation of the prisoner’s dilemma actually.

Of course, if it was decided beforehand that each person will pay for what they order, then I will be much more circumspect about what I decide to eat. I can’t afford to pay $50 for 5 shrimps!

Knowing this, it is in the restaurant’s best interests to ensure that everyone shares the bill equally, since only then will each person go berserk with their orders. Therefore, they must operate in such a way that it becomes very difficult to gauge who has eaten what.

One of the ways to do this is to serve everyone’s dish to everyone under the cloak of “etiquette”. In fact, I won’t be surprised if they invented the practice in the first place since and started calling it Good Manners. Good Manners it may be, but it’s also good business sense.

Of course, if you’re a greedy person and want to sample expensive food that you would never normally eat, you must get into a group of people you don’t know very well and who are not very well off. You must then convince them to go to an expensive restaurant so that you will be the only one to order expensive food and make them share the bill. I would assume you can only do this a couple of times before your group started to feel the pinch.

Sometimes however, a person’s personality can be so captivating and charming that others forgive them. Or say you’re a beautiful woman in the company of four men, they will not only forgive you, but fall all over themselves in fighting over your bill. You can then show how independent you are by paying “your share,” when actually you’ve shifted over all the expensive food’s cost to your lackeys!

Let’s assume you’re selling jeans and business trousers. The trousers will be of lesser value to a teenager and the jeans, say, will be of lesser value to an office-goer. Ideally, you want to be able to sell to both of these people. But if you set a high price for jeans, then the office-goer will not buy it, and if you set a high price for the trousers, then the teenager will not buy it.

As usual, our most direct strategy will never work. Namely asking the customer what they are willing to pay for it! No. We crafty game people need a more subtle approach.

So what are we looking for in such a strategy? We want to arrange things in such a way that both the office-goer and the teenager will buy both products for as much as they are willing to pay for each. To illustrate this, we need to plug in some numbers.

Jeans – Value to teenager: 100. Value to Office-goer: 50

Trousers – Value to Teenager: 50. Value to Office-goer: 100

Image Credit: inju

Ideally, we want the teenager to pick up both the jeans and the trousers for 100 and 50 respectively, spending a total of 150. We want the office-goer to buy the jeans and the trousers for 50 and 100 respectively. We want both to spend 150, and we want to net 150+150 = 300.

Clearly setting a single price for the garments isn’t going to do us any good since then either the teenager or the business person will end up either not buying it, or paying a lower price than they are willing to pay for it. The strategy to follow is that of bundling.

Bundling means that we package both the garments together and sell the bundle for 150! We wrap them nicely in a plastic bag and indicate that the two are inseparable. Now both the teenager and the office-goer can buy the bundle for a price of 150, paying as much as they would normally be willing to pay for each item. Our net gain is 300, and the office-goer as well as the teenager need never know of our clever manipulation.

There are several instances where certain items are worth different values to different people, and in situations like this, bundling can be very effective. If you remember the days of Nintendo, you would see (and you still do) cartridges that have something like 10,000 games in 1 at a reasonable price. How was this possible? The idea was that some people like certain games more than others. The best way to sell them was to put all the games together and hope that there will be something in the bundle for everyone. Selling them separately meant that almost no one would buy each game individually, but by bundling them, you ensure that you sell all of them.

This approach really works well for software since it is so easy to replicate. For bundling to work, you need to be able to manufacture the goods cheaply as well as have the goods be of varying worth to different people. When used properly , it can be a very effective strategy even for physical goods, just like the jeans and trousers example above.

However, even with perfect information, the pricing question can be very vexing. Say you know full well that 30% of the population is willing to pay a substantially higher price for your product. Setting the value at this higher price means that you lose out on the remaining 70% of your market who are not willing to pay that price. Setting a lower price means that you have wasted the spending power of that 30% who will now pay a lower price than what they were willing to pay.

What we need is a way to charge a higher price for those who are willing to pay more, and a lesser price for those who are willing to pay less. Simply ask each customer how much the product is worth to them, and charge them on that basis!

However, your customers might throw a fit if they realize that they are being charged simply because they are willing to pay more. No one likes to feel that they are paying more than another person who is getting the same service. In addition, customers will have a strong incentive to lie. Just because I’m willing to pay a high amount for a service doesn’t mean that I wouldn’t like to pay less for it.

The way to achieve this differential pricing is to identify customers who are willing to pay less for your product based on their behavior and charge less when you observe that behavior being followed.

Image Credit: washed up

One example is computer gadgetry. When a new computer gadget comes out, those who will only pay a lower price for it (the cheapskates) will not buy it immediately. When it comes to computer gadgets, cheapskates always feel that the prices will come down several months later. Therefore the best strategy for a company that is bringing out a new computer gadget is to charge high prices when the product comes out and deliberately lower those prices for the cheapskates later on.

Those who pay a high price for the gadgets will get bragging rights and the knowledge that they are the first adopters of the technology.

In most cases however, it is very difficult to identify the cheapskates. Fear not. Certain strategies exist that make the cheapskates identify themselves. This is called self selection. Using certain strategies, your firm can cause the cheapskates to unknowingly reveal their true colors. You can then charge them accordingly.

Image Credit: agthom

The strategy cannot be as simple as, “Whoever says that they are too poor to afford this product will get a 15% discount.” If it’s that easy, then everyone will follow it to get the discount. The idea is to make the cheapskates work for their discount. Those who are willing to pay a high price for the service are usually price insensitive and will not bother to go through the extra effort to get a lower price.

For example, several restaurants charge lower prices in the afternoon. Most people enjoy going to a restaurant in the night when they can party with their friends as part of a later plan to enjoy the rest of the evening. However, by offering lower prices at a time of the day when it’s slightly inconvenient, you invite the cheapskates to get your meals at a lower price. There’s no danger of your richest clients coming at this time simply to save a few bucks. For them, it’s simply not worth it. But you manage to get others who would not normally have come to your restaurant.

By making the cheapskates reveal themselves, you cause them to self select and are free to charge them lower prices. The self selection is always implicit instead of explicit. It’s never mentioned that lower prices are being charged for the sake of cheapskates. Pretty sneaky, huh?