Testing File-Sharing's Impact by Examining Record Sales in Cities

STAN J. LIEBOWITZ - University of Texas at Dallas - Department of Finance & Managerial Economics

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Abstract

The transmission of digitized music files, particularly on file-sharing networks, is having a profound impact on the consumption and production of music. Although previous forms of copying have been found to often have benign effects on copyright owners, the rise in file-sharing has coincided with a steep decline in the sale of sound recordings. This paper attempts to empirically examine whether file-sharing has caused the decline in record sales. It examines the size and pattern of file-sharing and its theoretical impact on record sales. Using a data set for 99 American cities containing information on Internet use, record sales, and other demographic variables, an econometric analysis is undertaken to explain the change in record sales before and after file-sharing. The results imply that file-sharing has caused the entire decline in record sales that has occurred and also appears to have vitiated what otherwise would have been fairly robust growth in the industry. Looking at sales in individual musical genres reinforces the primary conclusions. The record industry's risky strategy of assiduously fighting file-sharing, therefore, appears to have a rational basis.