Network Security: Vulnerabilities and Disclosure Policy

Chaim Fershtman (), Neil Gandal and Jay Choi

No 6134, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Software security is a major concern for vendors, consumers, and regulators since attackers that exploit vulnerabilities can cause substantial damages. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only the consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper develops a setting that examines the economic incentives facing software vendors and users when software is subject to vulnerabilities. We consider a firm that sells software which is subject to potential security breaches. The firm needs to set the price of the software and state whether it intends to disclose vulnerabilities and issue updates. Consumers differ in their value of the software and the potential damage that hackers may inflict and need to decide whether to purchase the software as well as whether to install updates. Prices, market shares, and profits depend on the disclosure policy of the firm. The paper analyzes the market outcome and derives the conditions under which a firm would disclose vulnerabilities. It then examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities. The paper discusses the incentives to invest in product security by investigating how a decline in the number of vulnerabilities and an increase in the probability that the firm will identify vulnerabilities ex-post (before hackers) affect disclosure policy, price and profits.

Keywords: Disclosure policy; Internet security; Software vulnerabilities (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-mic
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP6134 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: NETWORK SECURITY: VULNERABILITIES AND DISCLOSURE POLICY (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6134

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6134

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().