I don’t normally post on pieces behind subscription walls, but this piece in the Journal of Law and Economics is interesting. “Piracy on the Hi C’s” by Rafael Rob and Joel Waldfogel suggests that illegal downloading of music increases social welfare; statically, the result is predictable. The usual reason for providing intellectual property rights, as currently practiced, is that even though they’re statically inefficient, in that they reduce use that doesn’t take away from someone else’s use of a product, they are disincentive to provide the good in the first place. How the lower supply compares to welfare imporvement is an open question. But they do measure it.
Recording industry revenue has fallen sharply in the last 3 years, and some—but not all—observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as consumers’ valuations of these albums, among a sample of U.S. college students in 2003. We provide new estimates of sales displacement induced by downloading, using both ordinary least squares and an instrumental variables approach with access to broadband as a source of exogenous variation in downloading. We find that each album download reduces purchases by about .2 in our sample, although possibly by much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of University of Pennsylvania undergraduates, and we find that downloading reduces their per capita expenditure (on hit albums released 1999–2003) from $126 to $101 but raises per capita consumers’ surplus by $70.