Digital Piracy File Sharing and Music Sales

The Industry View: RIAA As a result of sound recording piracy: The U.S. economy loses $12.5 billion in total 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 acquired by U.S. consumers in 2009 was 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 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 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,

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), 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), Klein, Christopher C. and Shea W. Slonaker “Chart turnover and sales in the recorded music industry: ” Review of Industrial Organization, 36: 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), Zentner, Andrew (2006). “Measuring the effect of file sharing on music purchases.” The Journal of Law and Economics, 49(1),