A property rights view on the impact of file sharing on music business models - why iTunes is a remedy and MusicNet is not

This article addresses the issue of file sharing from the music industrys specific point of view - and with a strong economic approach. Following the property rights theory we model the problem of file sharing systems for the music industry as a trade-off between negative external effects caused by uncompensated exchange of music files and transaction costs to internalize these effects. The aggregated curve of both effects shows the optimal degree of internalization of property rights at its minimum. We argue that with the appearance of file sharing systems it is more expensive now to enforce property rights on music files. In the models context this leads to a rise in transaction costs which in turn lowers the optimal degree of internalization. Future music business models will have to pay attention to the fact that some property rights can not be allocated anymore and accept a new situation in which consumers have the possibility and intention to exchange and copy media files.

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