1 G604 IO II G604 IO II Eric Rasmusen, Eric Rasmusen, 14 April _June2005_final.pdf _June2005_final.pdf Felix Oberholzer and Ko`leman Strumpf, "The Effect of File Sharing on Record Sales An Empirical Analysis," "The Effect of File Sharing on Record Sales An Empirical Analysis,""The Effect of File Sharing on Record Sales An Empirical Analysis,"

2Readings 13 April, Thursday. File Sharing and Record Sales, Felix Oberholzer and Koleman Strumpf, "The Effect of File Sharing on Record Sales An Empirical Analysis," Harvard Business School (March 2004). 13 April, Thursday. File Sharing and Record Sales, Felix Oberholzer and Koleman Strumpf, "The Effect of File Sharing on Record Sales An Empirical Analysis," Harvard Business School (March 2004)."The Effect of File Sharing on Record Sales An Empirical Analysis,""The Effect of File Sharing on Record Sales An Empirical Analysis," g_June2005_final.pdf g_June2005_final.pdf

3 Does Filesharing Hurt Music Sales? Yes– it is a substitute for buying Yes– it is a substitute for buying No– it gives free samples and encourages buying (newspapers) No– it gives free samples and encourages buying (newspapers)

4 Does Industry Opposition Tell Us Filesharing Hurts Sales? O-S: No, the industry is stupid--- or at least makes mistakes sometimes. O-S: No, the industry is stupid--- or at least makes mistakes sometimes. I disagree. The mistakes they describe (footnote 2) are mistaken predictions, not mistaken evaluations of current profits. I disagree. The mistakes they describe (footnote 2) are mistaken predictions, not mistaken evaluations of current profits.

5 Picking a Null Hypothesis P. 4: Drawing on our most precise estimates, we can statistically reject the null that even a quarter of the recent sales decline stems from file sharing. At the same time we can never reject the hypothesis that downloads have no effect on overall sales.

6 Summer Sales We document that the share of sales during the summer months when fewer students have access to high-speed campus Internet connections has not changed as a result of P2P.

7 So Why Are Music Sales Down? Finally we document that the recording industry often experiences sales reductions, including a recent episode with a sharper reduction than the current period. P. 4

8 The Data 1. Weekly sales in 2002 of 680 albums which have 10,271 songs, a stratified sample (they dont say how they sampledBAD) The p. 10 K-S distribution test is meaningless, since they dont say what they are testing. On p. 11 they tell us a KS test of the sample over TIME is OK. 2. U.S. individual song downloads over 4 months in (1.75 million? 260,889?) They find 47,709 match their 680 albums.

9 Basic Regression (p. 13) P. P. S is sales of the album, X is album characteristics, D is number of downloads Question: What is D? Downloads of individual songs from an album, I think, but they dont say, even though that is hugely important. Notice that they dont use any individual song characteristics, just album characteristics.

10 Variables to Add 1. A polynomial time trend of degree 6 (!) 2. Album fixed effects 3. Why not use time fixed effects? – probably because they want to use other time variables. Their sales data is 2 nd half of that is, it includes Christmas sales. They dont give summary stats or a graph of sales or downloads over time.

11 Identification When unobservables mu is big because an album is good, so is D, the number of downloads. So, it will seem as if having lots of downloads also causes high sales. We need an instrument for D: something which is correlated with downloads, but not with sales. Difficulty of downloading affects downloads, but does not affect sales directly (it does via its effect on Downloads, but that is OK for us)

12 IV: Variables for Difficulty of Downloading I 1. Album-specific, fixed over time 1. Album-specific, fixed over time Spelling difficulty of the song names in the album Spelling difficulty of the song names in the album Length of songs in the album 2. Time-specific, fixed across albums 2. Time-specific, fixed across albums German school holidays (because German kids upload songs, making it easier for Americans to download) German school holidays (because German kids upload songs, making it easier for Americans to download) Are German holidays uncorrelated with US music SALES? (Xmas?) Are German holidays uncorrelated with US music SALES? (Xmas?) Internet weather– 4 congestion variables Internet weather– 4 congestion variables 3. Varying with both album and time period… 3. Varying with both album and time period…

13 IV: Variables for Difficulty of Downloading II 3. Varying with both album and time period 3. Varying with both album and time period Mean album length of albums in that same music category (limits on storage space-- ??? Are these a constraint? Are albums erased? Noarchived, is claim, p. 17) Mean album length of albums in that same music category (limits on storage space-- ??? Are these a constraint? Are albums erased? Noarchived, is claim, p. 17) (Germans on vacation)*(album performers are on tour in Germany) (Germans on vacation)*(album performers are on tour in Germany)

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15 Here, go the tables in the paper: leSharing_June2005_final.pdf leSharing_June2005_final.pdf leSharing_June2005_final.pdf leSharing_June2005_final.pdf

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17 A link to the course website