Measuring the Effect of Music Downloads on Music Purchases

File sharing may substantially undermine intellectual property rights of digital goods. This paper concentrates on the music industry. I estimate the effect of music downloads on music sales using two data sources: a panel of aggregate music sales by country for 1997-2002 and a European individual level cross section of 15,000 people from October 2001. Using the number of internet and broadband users by country as a measure of users of P2P systems, the panel of aggregate data shows a large impact of downloads on music sales. In the micro data, a simple comparison of means shows that people who regularly download music online are more likely to buy music. The positive relationship persists when controlling for observed characteristics. However, simultaneity between tastes for music and peer-to peer usage makes it difficult to isolate the causal effect of music downloads on music purchases. To break that simultaneity, I use measures of internet sophistication and the speed of the internet connection as instruments. The results suggest that peer-to-peer usage reduces the probability of buying music by an average of 30%. Based on this estimate for the reduction in the probability of buying music, back of the envelope calculations indicate that without file sharing sales in 2002 would have been around 7.8 percent higher. * Department of Economics, University of Chicago (alezentn@uchicago.edu). I wish to thank Austan Goolsbee, Steven Levitt and Hugo Sonnenschein for their advice and encouragement. I also thank very useful comments from Nathaniel Baum-Snow, Gary Becker, Dennis Carlton, Carolina Czastkiewicz, Julio Elias, Jonah Gelbach, Thomas Hubbard, Anupam Jena, David Levine, Jose Liberti, Douglas Lichtman, Laura Martinolich, Kevin Murphy, Alejandro Rodriguez, and Chad Syverson.

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