Pirated for profit

This paper explains why a software manufacturer may permit limited piracy o f its software. Piracy can be viewed as a form of price discrimination in w hich the manufacturer sells some of the software at a price of zero. In the presence of significant network externalities for the software, it may be profit maximizing for the software manufacturer to tolerate piracy by home consumers, most of whom have a low willingness to pay. This can increase th e demand for the software by business users. JEL Classification: L2.