November 27, 2020

New Study on Filesharing Effects

There’s a new study out, by Rafael Rob and Joel Waldfogel, on the effect of filesharing on music sales. The news headlines will say that the study shows that filesharing hurts CD sales (as the BBC story does); but the full results are more complicated.

The study relied on surveys of college students: a preliminary survey of a large group at four institutions, and a more detailed followup survey of undergraduates at the University of Pennsylvania. The most interesting results come from the smaller Penn survey.

It’s worth noting that this kind of study is likely to overestimate the negative impact of filesharing. The survey samples only college students rather than all filesharing users – and, contrary to popular myth, students account for only a small minority of filesharing activity. As I’ve explained before, surveys of younger people will tend to overweight the harmful effects of filesharing. (Rob and Waldfogel are upfront about the limitations of their study.) For the sake of discussion, I’ll set aside the drawbacks in the study for now, and assume it is correct and it generalizes to the population as a whole.

The heart of the study is an economic comparison, based on the survey data, between the current world, where students do a certain amount of filesharing, and a hypothetical world where filesharing is impossible. The availability of filesharing decreases consumer spending on music from $126 to $101 annually. That’s $25 of lost revenue for the music industry. But it’s only half of the picture.

The other half is the effect of filesharing on consumers. The average consumer is $70 better off with filesharing than without. Of that $70, $25 comes from downloading music rather than buying it, but $45 comes from getting access to music that the consumer wouldn’t have bought anyway. (In econo-speak, deadweight loss is reduced by $45. For more details, see pp. 26-27 of the report.)

This raises an interesting public policy question. The proper goal in this policy area is to maximize total welfare, and not simply to maximize industry profit. (Industry profit is good only insofar as it creates incentives for industry to do things that increase total welfare.) The direct effect of filesharing is to increase total welfare by $45 per capita (increasing consumer welfare by $70 and reducing industry welfare by $25, for a net gain of $45). If direct effects were the only effects, then the right policy would be to allow filesharing.

But of course there are indirect effects, most obviously that the drop in industry revenue reduces the incentive to create new music. The predictable result is that less music will be made. There can be little doubt that the loss of this music will reduce total welfare. The key question is how much welfare loss these indirect effects will cause. If they cause less than $45 per capita of harm, then allowing filesharing may still be a good idea. If they cause more than $45 of harm, then allowing filesharing seems to be harmful. $45 is a lot of welfare to offset – based on the study’s numbers, reducing the production of commercial music all the way to zero would reduce total welfare by only about $125 per capita.

So it’s certainly not right to say that the report shows filesharing should be illegal. (Nor is it right to say that the report shows the opposite.) The report doesn’t quite reach the most interesting policy question.

(Tomorrow I’ll write about the effect of authorized online music services on this analysis.)

Comments

  1. I think that there are other factors that must be considered, and I think one that is miss stated.

    1) The “real” cost to the creators/distributers must be computed based on the royalty and non physical prodution costs, and not the Retail charges that contain promotion and distribution costs that are not directly valid for production and availability of the content.

    2) I agree that there are promotion costs that might be considered, but availability on the intenet is also a possible promostion and so I consider promotion costs like distribution costs, not necessarly contributing to the creation…

    3) Finally, there is the argument that once people hear music, some of them will be more likely to purchase similar content, so there might be some consideration of the sales that may be made due to the internet content.

  2. Mike:

    Neither my post nor (as far as I can tell) the Rob/Waldfogel paper tries to evaluate the cost of producing music. They look only at the revenues of the music companies (which necessarily consist of costs plus profits), and the costs and benefits experienced by consumers.

    It’s true that predicting what the music industry would do in different scenarios would require an understanding of their cost structures, but that’s beyond the scope of my post.

    Regarding sampling, in which people decide to buy something after downloading, the report did evaluate this, and found that the students in the Penn sample ended up buying about 4.4% of the albums that they had downloaded.

  3. New Study on Filesharing Effect (Part 2)

    Continuing yesterday’s discussion of the new Rob/Waldfogel filesharing study, let’s look at the possible effect of authorized downloading services. As we saw yesterday, one of the main findings of the study is that people derive lots of benefit (about …

  4. Thanks… Sorry for miss-reading your post