Competition for Exclusivity and Customer Lock-in: Evidence from Copyright Enforcement in China

Abstract

Copyright law grants the exclusive right to copyright owners so that they have adequate financial incentives to create and innovate. However, when firms are copyright owners, they can leverage the exclusive right to sell or distribute products exclusively. This paper studies the music streaming industry, where streaming services compete for exclusive licenses from music labels. Service providers use exclusive content to attract users, tailoring their services to individual preferences that create switching costs leading to user lock-in. I first use theoretical analysis and descriptive empirics to show that exclusivity confers advantages in competition to a service that can generate larger lock-in effects. I then construct a dynamic structural model in which consumers face switching costs when making subscription decisions. I estimate the model using the monthly data from China’s music streaming market over 2014-2017. Finally, I simulate market outcomes under two alternative policies, a compulsory licensing provision, and a mandatory data portability policy. The policy simulation shows that compulsory licensing that enforces non-exclusive distribution would not improve market competition by “leveling the field” between dominant and small services as intended. On the contrary, the policy increases market concentration, enlarging the gap in market share between dominant and small services. In contrast, mandatory data portability that reduces switching costs would reduce market concentration, bringing more users to smaller services.

Keywords: Copyright Enforcement, Exclusivity, Switching Costs, Multihoming, Compulsory Licensing

JEL Classification: L13, L42, L51