Digital PiracyFile Sharing and Music Sales

The Industry View: RIAA

As a result of sound recording piracy:The U.S. economy loses $12.5 billion intotal output annually;The U.S. economy loses 71,060 jobs;

The Industry View: RIAA• The most popular music is also

the most pirated• that is why sales of the top 10

selling albums have declined significantly during the past ten years

The Industry View: RIAA

Only 37% of music acquiredby U.S. consumers in 2009was paid for.

Revenue Streams in Billions of Dollars

What legal forms of music acquisition are missing here?

Contrary Views• Fader argues that • substitutes for recorded music (video games, DVDs, chat rooms) • and a downturn in GDP growth • contributed to sales declines in 2000-2003.

• Stevans and Sessions (2005) suggest that • digital downloads altered the price elasticity of demand for

recorded music such that the demand fell• but after controlling for the price of music, prices of substitutes,

and income, consumption of recorded music actually increased (0.77%) over 2000-2004.

• Zentner (2006) and Oberholzer-Gee and Strumpf (2007) • illegal downloading and file-sharing accounted for a decline of

music sales between zero and 7.8%

Contrary Views

• Klein and Slonaker (2010, 2012 working paper) • After controlling for price of music, prices of substitutes and

complements, income and demographic changes• Music sales contain a positive unobserved component consistent with a

sales decline of 0.5% due to file-sharing and other factors, 2000-2008.

How could file sharing not reduce sales?

• File sharers spend more on music than non-sharers (Torrent Freak, see table below)• P2P file sharing accounts for only 18% of music

consumption• Listening to samples of music online may induce more

consumers to purchase music online as the cost of search declines (Gopal 2006)

How could we model file sharing?• Is the extent of illegal file sharing affected by the price of

music?• Would everyone pirate files if the price of legal music was too

high?• Would some people pirate files regardless of the price of legal

music?• Are there other factors that affect file sharing and piracy?• Modifying the Dominant Firm Model• Opportunities for price discrimination require

• Market Power• Differences in demand between customer groups• Identify and separate these groups• Prevent arbitrage

• Evidence of price discrimination?

References• Oberholzer-Gee, Felix, and Koleman Strumpf. (2007). “The effect of file

sharing on record sales: an empirical analysis.” Journal of Political Economy, 115(1), 1-42.

• Fader, Peter S. Expert report. A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896.

• Gopal, Ram D., Sudip Battacharjee, and G. Lawrence Sanders. (2006). “Do artists benefit from online music sharing?” Journal of Business, 79(3), 1503-1533.

• Klein, Christopher C. and Shea W. Slonaker. 2010. “Chart turnover and sales in the recorded music industry: 1990-2005.” Review of Industrial Organization, 36: 351-72.

• Stevans, Lonnie K. and David N. Sessions. (2005). “An empirical investigation into the effect of music downloading on the consumer expenditure of recorded music: a time series approach.” Journal of Consumer Policy, 28(3), 311-324.

• Zentner, Andrew (2006). “Measuring the effect of file sharing on music purchases.” The Journal of Law and Economics, 49(1), 63-90.