miscellaneous factZ

A new study is out on the relationship of unauthorised downloading and music purchases. The work was carried out by two economists, Birgitte Andersen and Marion Frenz, of Birkbeck College (University of London) for Industry Canada. Entitled The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada its description states:

Industry Canada undertook a music file sharing study during 2006-07 to measure the extent to which music downloads over peer-to-peer file sharing networks, for which the sound recording industry receives no remuneration, affect music purchasing activity in Canada. The data used for this analysis are from a Decima Research survey conducted between April and June, 2006, on behalf of Industry Canada. The report, prepared by University of London researchers, Birgitte Andersen and Marion Frenz, found that music downloads have a positive effect on music purchases among Canadian downloaders but that there is no effect taken over the entire population aged 15 and over.

This is a new contribution to the literature examining the relationship of unauthorised downloading and sales which I first reviewed two years ago. The results would clearly support those who argue that the positive sampling effect of unauthorised p2p downloading counterbalances (or even outweighs) the substitution effect (for more on these terms see the review). The effects found are quite substantial, at least when restricted to their P2P downloaders subsample (from the summary of findings)

“… our analysis of the Canadian P2P file-sharing subpopulation suggests that there is a strong positive relationship between P2P file-sharing and CD purchasing. That is, among Canadians actually engaged in it, P2P file-sharing increases CD purchasing. We estimate that the effect of one additional P2P download per month is to increase music purchasing by 0.44 CDs per year” [emphasis added]

However looking through the paper one needs to be a little cautious in taking these results at face value. In particular, the statement in the abstract that “music downloads have a positive effect on music purchases among Canadian downloaders” is a classic case of interpreting a correlation as a causative relationship (this (mis)interpretation is even more baldly stated in the summary of findings — see previous quote above). Given the cross-sectional nature of their data such an interpretation is particularly dubious (as the authors themselves acknowledge in the Data and Methodology section: “… regressions based on cross-sectional data cannot prove causality”).

Furthermore, there is a major problem here with the regression specification: p2p downloads and music purchases may both be driven by an omitted variable — for example interest in music. In that case a simple regression of purchases on downloading activity will be upwardsly biased (i.e. the impact of downloads on purchases will be too high) because those interested in music would then both download more and purchase more. To address this problem you’d need some form of ‘identification’ strategy, probably using an instrumental variables approach. (This issue is very similar to that encountered when doing straight regression of sales on downloads — again the estimated coefficient is going to be upwards biased because both trend (independently) upwards when an album is released.) This problem could be made even worse by focusing solely on downloaders.

Again the authors are aware of this issue but don’t feel they can do much about it (from the end of the Data and Methodology section):

… single equation estimations assume that all independent variables are exogenous and all important variables are included in the estimation. If, however, any of the independent variables are influenced by the dependent variable and/or any of the independent variables, or important independent variables are omitted, then the included independent variables tend to be correlated with the error term leading to inconsistent estimates

Unfortunately, useful instruments are inherently difficult to find and this is why we decided not to use instrumental variable techniques. … …

While it may be true that there was not much they could do about this issue given the data they had it does mean that one should be cautious in taking the regression results at face value — in particular the main finding, for the downloaders subsample, of a substantial positive effect of (unauthorised) downloads on CD purchases, which may simply be picking up an omitted variable (for example, interest in music).

As is the way with Academic Journals nearly 3 years after the original version (and two after the revised one) the Oberholzer and Strumpf study (see my summary of the p2p literature for details) is now out in the JPE.

http://papers.ssrn.com/abstract=936049

A while back someone pointed me at an interesting paper by Julie Mortimer and Alan Sorenson entitled, Supply Responses to Digital Distribution: Recorded Music and Live Performances, which they presented at the 2006 AEA conference. I’ve only had a chance to glance through this but it appears to have some interesting data — and some interesting conclusions — for those interested in of the impact of unauthorized filesharing on artists, consumers and society as a whole.

Abstract

Technologies for reproducing and redistributing digital goods have made it more difficult to earn profits from their sale, leading to concerns that socially valuable digital products with non-convex production technologies may not be brought to market. However, digital goods are often jointly supplied with non-digital products, and changes in distribution technologies affect not only the market for the digital product, but also the pricing and profitability of the non-digital good. We outline a simple model illustrating these effects in the music industry, and test the model’s implications using detailed data on weekly CD sales and individual concert performances for nearly 2,000 musical artists over a ten-year period. We show that while sales of recorded music declined after the introduction of file-sharing, concert revenues and the number of artists performing concerts increased dramatically. We examine whether these changes were most pronounced among artists or markets where file-sharing was likely to be most significant. Overall, the patterns in the data suggest that while file-sharing may have eroded profits from CD sales, it also increased the profitability of live performances.

Title: Why the music industry may gain from free downloading — The role of sampling

DOI: http://dx.doi.org/10.1016/j.ijindorg.2005.10.006

Authors: Martin Peitz and Patrick Waelbroeck

Journal: International Journal of Industrial Organization, Volume 24, Issue 5 , September 2006, Pages 907-913

Abstract: Downloading digital products for free may harm creators and intermediaries because consumers may no longer buy the version for sale. However, as we show in this paper, this negative effect may be overcompensated by a positive effect due to sampling: consumers are willing to pay more because the match between product characteristics and buyers’ tastes is improved. This indeed holds under sufficient taste heterogeneity and product diversity.

Keywords: File-sharing; P2P; Sampling; Information transmission; Piracy; Music

JEL classification codes: L11; L82

Comments

I haven’t yet been able to take a look as this article (online access only through sciencedirect)

Just came across another paper evaluating the effect of filesharing published earlier this year. Authored by Norbert J. Michel (now of Nicholls State University) and is entitled The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis (Berkley Press’ Topics in Economic Analysis & Policy: Vol. 6: No. 1, Article 18) is available at: http://www.bepress.com/bejeap/topics/vol6/iss1/art18 under a ‘quasi-open-acess’ policy (which so far has at least had the effect of preventing me accessing it).

ABSTRACT:

The first file-sharing software, Napster, was shut down in 2001, but the copying technology’s impact on the music industry is still passionately debated. This paper uses micro-level data from the Consumer Expenditure Survey to examine the impact of Internet file sharing on music sales. Music industry representatives argue that the practice decreases CD sales, while supporters of file-sharing allege the practice could actually increase sales. Using household-level data from the Consumer Expenditure Survey, we find support for the claim that file-sharing has decreased sales.

May have some commonality with the same author’s earlier Digital File Sharing and the Music Industry: Was There A Substitution Effect?, Review of Economic Research on Copyright Issues, 2005 Issue, vol. 2(2), pp. 20-32.

Summary

Exact same approach as Hong’s previous work (see summary in http://www.thefactz.org/economics/p2p_summary.html) but less detailed:

• Hong uses data 1996-2001 (p.31) while Norbert uses data from 1995-2003 (p.4).

• Identification strategy: Compare CD purchases (available at micro-level from the CEX) between ‘computer owner’ and non-’computer owners’ (CEX variable again) and attribute differences to file-sharing.

• Both use a Difference-in-Differences (DiD) approach

• Hong does quite a bit of extra such as
  • estimating a demand system for entertainment goods (17 ff.) in an effort to account for the affect of the changing prices of other entertainment goods (videos declined in price over the sample period)
  • kernel matching (12 ff.) to deal with possibility of other underlying differences between treatment (owners) and control group (non-owners)
• Conclusions: Norbert estimates a 13% decline while Hong settled on an 18% decline (or 33% taking the less conservative figure on p.28)

Just as with Hong (and Zentner’s Broadband variable) the major concern is regarding identification strategy: it is difficult to be confident of estimates that depend on assuming that differences in purchases between computer owners and non-owners can be attribued entirely to file-sharing, particularly when computer-ownership may be associated with so many other activities and characteristics.

Lessig reports on some work done by Claus Pedersen on filesharing in Denmark. Unfortunately the full paper is in danish but a summary has been translated by Marie Elisabeth Pade and is available at http://www.lessig.org/blog/archives/danish_filesharing.pdf.

I’ve put up a summary of the literature on the impact of P2P on music sales that has emerged over the years. You can read the full text here but these are the basic conclusions:

An explosion in research (mainly dependent on access to proprietary data) as a result of public interest in these issues means that we are now in a position to provide answers with some degree of certainty. The basic result is that online illegal file-sharing does have a negative impact on traditional sales. The size of this effect is debated, and ranges from 0 to 100% of the sales decline in recent years, but a figure of between 20 and 40% would be a reasonable consensus value (i.e. that file-sharing accounted for 20-40% of the decline in sales not a 20-40% decline in sales).

Beyond this basic result several other very interesting facts have emerged. First is the differential impact of file-sharing on an artist depending on their existing popularity. According to Blackburn who investigates this issue the ‘bottom’ 3/4 of artists sell more as a consequence of file-sharing while the top 1/4 sell less. Second is the first tentative estimates (by Waldfogel and Rob) of the welfare consequences of file-sharing. Waldfogel and Rob’s dramatic result is that file-sharing on average yields a gain to society three times the loss to the music industry in lost sales. While, as they emphasize, this result is preliminary and based on limited data it indicates the urgent need for more research on this issue as well as the possibility to have a win-win situation in which both creators and the public get a better deal via a change to alternative compensation system such as a levy.