It has less to do with cutting into your sales, and more with jeopardizing your IP and ownership rights. If this sort of theft is left unattended, the other side may start asserting its non-existing rights and escalate the situation.
It all really comes down to the risk tolerance. Opening the source establishes great deal of a goodwill towards your customers and potentially provides you with an access to free improvements and bugfixes. On other hand it opens you to the risk of needing to actively protect your IP rights, which is something that not everyone want or can do.
That's not even getting into how emotionally draining these incidents can be. It requires a really thick skin and a strong ability to ignore being taken an advantage of. Again, not everyone's traits.
If the source is open, then anyone who bases a product on it has to abide by the license. Are you talking about the case of someone who downloads the source, and bases a derived product on it without abiding by the license and releasing the source code? Can't illegal distribution happen with closed source software as well? Or are you saying it's more likely to happen if the source is open, and therefore more of a potential headache?
It all really comes down to the risk tolerance. Opening the source establishes great deal of a goodwill towards your customers and potentially provides you with an access to free improvements and bugfixes. On other hand it opens you to the risk of needing to actively protect your IP rights, which is something that not everyone want or can do.
That's not even getting into how emotionally draining these incidents can be. It requires a really thick skin and a strong ability to ignore being taken an advantage of. Again, not everyone's traits.