Do Artists Benefit from Online Music Sharing?

Abstract:     
Music is an information good, and more specifically, an experience good, whose true value is realized only after its consumption. At its fundamental form, artists create (or produce) the music that consumers pay to listen. Digital technologies and network based sharing/distribution mechanisms have created tremendous opportunities and challenges for producers and consumers of such goods. This paper models the economics of online music sharing and addresses the fundamental question: who benefits? The model incorporates economic and technological incentives to sample, and analyzes the effect of consumers' potential purchasing and pirating decisions. The analysis reveals several key insights. The revenue impact will be more closely related to the intrinsic value of the music to consumers, as these technologies enable users to discover the true value of music more easily. Contrary to conventional wisdom, lowering the cost to sample music will propel more consumers to purchase music online, as the total cost of evaluation and acquisition decreases. Attempts to prevent sampling will be counter productive in the long run. Reducing the cost to sample may encourage some consumers to pirate music; but it also enhances the legitimate customer base by decreasing the total cost of music acquisition. This, along with increasing enforcement aimed at individual consumers and effective pricing schemes, will enable artists to effectively leverage the emerging technologies. The model also sheds light on the conflicting opinions by the artist community on the impact of sharing technologies. We find that sharing technologies erode the superstar phenomenon widely prevalent in the music business. Extensive empirical investigations, based on surveys and Billboard Ranking Charts, lend support to the economic model and validate the key results. Implications from this study are generally applicable to buyers and sellers of other similar digital experience goods.

Keywords: Superstar, experience good, online music sharing, sampling, piracy, economics of music

JEL Classifications: C15, D83, L15, L82, 033, Z1

Accepted Paper Series