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Xinyu Hua & Kathryn E. Spier, Settling Lawsuits with Pirates (Aug. 6, 2020).

Abstract: A firm licenses a product to overlapping generations of heterogeneous consumers. Consumers may purchase the product, pirate/steal it, or forego it. Higher consumer types enjoy higher gross benefits and are caught stealing at a higher rate. The firm may commit to an out-of-court cash settlement policy that is “soft” on pirates, so high-types purchase and low-types steal. This facilitates price discrimination. Firm profits rise if the firm bundles a license agreement with the cash settlement. However, requiring pirates to sign license agreements as part of the settlement has ambiguous welfare effects and may deter the entry of more efficient competitors.