Piracy and the Legitimate Demand for Recorded Music

Abstract

Publishers of computer software and music claimed losses of nearly $16 billion to piracy in 1999. Theoretically, however, piracy may raise legitimate demand through positive demand-side externalities, sampling, and sharing. Accordingly, the actual impact of piracy on the legitimate demand is an empirical issue. Addressing this issue in the context of recorded music, we develop and test hypotheses from theoretical models of end-user and re-seller piracy on international panel data for music CDs. Empirically, we find that the demand for music CDs decreased with piracy, suggesting that "theft" outweighed the "positive" effects of piracy. However, the impact of piracy on CD sales was considerably smaller than industry estimates. Further, we estimated that, accounting for both demand losses and price adjustments, the industry lost no more than 6.6% of revenue to piracy.

Keywords: music, copyright, pricing

JEL Classification: K42, L11, L82, Z11