The major question facing internet downloading of music is do internet users download music that they would normally buy (which would hurt the music industry) or do they download music that they do not value highly enough to purchase (which would not hurt the music industry and would raise consumer utility). The consensus is that former is true: downloaders avoid paying for music that they would normally buy. In Piracy on the High C’s, Rob and Waldfogel agree with this intuition and find that each album downloaded reduces purchases by about 20%. Using a sample of Penn undergraduates, they find that internet downloading caused a drop in expenditure per person on hit albums released between 1999 and 2003 from $126 to $100 but raised individual consumer welfare by $70.
From 1994 to 2001, the music industry enjoyed an average growth of 10% annually. However, industry revenue shrunk a total of 16% over the next three years. The cause of this decline has sparked considerable debate. The Recording Industry Association of America (RIAA) believes that the increase in the illegal downloading of music is the major cause. They estimate that they lose about $4.2 billion to piracy every year. Greater prevalence of the internet, faster connections, and more important complementary goods like MP3 players and blank CDs serve as the technology needed for downloading. As this technology continues to grow, the RIAA fears that this sales displacement will also continue to grow accordingly. The RIAA uses lawsuits aimed at individual music sharers as their major deterrent. The results of these lawsuits have been mixed. Many criticize the RIAA for going after the “little guys.”
Rob and Waldfogel summarize the current economic theory regarding music downloading and conclude that empirical observation will be superior to the theoretical approach. They cite numerous theoretical studies that contradict each other to emphasize this point. Nonetheless, the authors describe the theory from the demand and supply sides. On the demand side, music sharing does not necessarily mean less music will be purchased. Imagine two individuals each valuing a CD below its price. If they can share it, they may be willing to purchase the CD together that they alone were not willing to buy. Furthermore, free samples may also stimulate the sales of related CDs meaning that downloading would actually be profitable.
Rob and Waldfogel also describe the supply side of the equation. Because CD production is so inexpensive, the marginal cost of an additional CD is close to 0. In a competitive market, the label would sell CDs at a lower cost in order to capture more of the market. However, each record label owns a specific album, and therefore, is a single price monopolist. Therefore, in order to maximize profits, the label will sell the CD at a higher price which will create a deadweight loss. If internet users download the music that they value below the selling price, then the industry will not be hurt but the downloaders welfare will improve.
The authors use original surveys to test whether internet downloading hurts music sales. Their sample includes roughly five-hundred students at UPenn, Hunter College, Chicago’s MA program in public policy, and CCNY. The authors find that students download CDs that they value 33% less than the CDs that they purchase. They find that for every CD downloaded, students are 10% to 20% less likely to buy another CD. If every downloaded CD was going to be purchased by the student if downloading was not available, this percentage change would be 100%. Essentially, there is incomplete sales displacement. Therefore, roughly two-thirds of the change in welfare comes from the reduction of deadweight loss which benefits the student instead of the record companies losing out. However, as the data shows, the record companies still lose.
Rob and Waldfogel conclude that their sample is small and more data is needed. They recommend that research focus on whether downloading affects the quantity and types of music that are recorded and marketed in the first place. Clearly the record labels have reasons to be concerned, but outside benefits such as generating buzz for other music likely mitigate some loss in sales.
The authors point out the major weakness of their paper: a sample of college students is not representative of the entire population. If there is a 20% reduction in sales because of downloading amongst college kids, this reduction is much smaller amongst the general population. College kids are more internet savvy, have more access to high-speed connections, and probably listen to more music than the average American. One could argue, however, that the students surveyed in this study will retain their internet savvy and make high-speed internet connections a priority. If this is the case, the college students of today provide a rather accurate picture of the average person in twenty years.
Free downloading is a problem that could potentially grow and should therefore be addressed by the RIAA. An economic framework differentiates wild speculations from the truth. I do not believe that this problem can be fully fixed but I do not think it will ever ruin the music industry. The music industry is currently trying to have people legally download music by paying for it. This is a good answer.