Should the Music Industry Sue Its Own Customers? Impacts of Music Piracy and Policy Suggestions

Two beliefs about music piracy prevail in the music industry. First, music piracy hurts music record sales. Second, the only copyright regime that can help the music industry is one that will eradicate music piracy. To test the two beliefs, I construct a unique survey data set, estimate the demand for music and iPods and show three things. First, music piracy does hurt record sales. Second, music piracy contributes 20% to iPod sales. Finally, counterfactuals experiments show that while a regime without music piracy benefits music producers at the expense of students and Apple, another regime with legal online music and iPod royalty benefits most students and music producers at the expense of Apple. ∗I am indebted to my advisor Pat Bajari for his continuous encouragement and support. I benefit from the suggestions of Tom Holmes, Kyoo il Kim, Om Narasimhan, Minjung Park, Amil Petrin, Hakki Yazici, and seminar participants at Bates White, Colby College, Columbia University, Federal Reserve Bank at Kansas City and University of Minnesota. I also thank Dulguun Batbold, Andrew Cassey, John Dalton, Tom Holmes, Nick Guo, Christos Ioannou, Ka Fai Li, Mallory Leung, Tina Marsh, Connan Snider, and Junichi Suzuki for their help in conducting the survey. Lastly I am grateful to the Economics department of the University of Minnesota for financial support. The usual disclaimer applies. Correspondence: tleung@cuhk.edu.hk