Essays on the economics of copying and the recorded music industry

This dissertation examines the effects of unauthorized copying on the market for reproducible goods and in particular the effect of file sharing on the market for recorded music. The first chapter looks theoretically at the two main effects of copying in the face of network externalities. The "copying effect" reduces demand (and thus profits) due the introduction of a better outside alternative to consumers. However, a "network augmenting" effect works to increase demand through the larger network size that copies create. In a dynamic setting, as a market matures, the network augmenting effect becomes relatively less important and thus the typical pattern of copyright enforcement involves little enforcement at product introduction, followed by increased enforcement as the market matures. The second chapter analyzes the effects that file sharing has had on the recorded music industry in the short run. The availability of digital copies on file sharing networks has competing effects on sales that vary across artists. First, there is a direct substitution effect on sales as some consumers download rather than purchase music. Second, there is an effect which increases sales, as the spread of an artist's works helps to make the artist more well-known throughout the population. The first effect is strongest for ex ante well-known artists, while the second is strongest for ex ante unknown artists. Thus file sharing reduces sales for well-known artists relative to unknown artists. Using these estimates, I find large aggregate negative effects on sales not found in previous work that failed to account for these artist differences. Finally, the third chapter analyzes how these changes have affected the incentives to develop new artists and to invest in existing artists in the long run. A model is developed which illustrates that while file sharing certainly reduces incentive to release albums from already established artists, there is an increased incentive to develop new artists. The implications of this model are tested with data from Billboard magazine's Hot 200 sales charts over a 14 year period from 1992 to 2005, producing little evidence of major changes on the supply side of the recorded music industry since 1999.