The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: a Study for Industry Canada

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The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada

by

Birgitte Andersen* and Marion Frenz** Department of Management Birkbeck, University of London Malet Street, Bloomsbury LONDON WC1E 7HX, England, UK

*Reader in the Economics and Management of Innovation, and Director of E-Business Programmes Tel: +44 (0)20 7631 6848 b.andersen@bbk.ac.uk ** Lecturer in Management Tel: +44 (0)20 7631 6829 m.frenz@bbk.ac.uk

THE VIEWS EXPRESSED ARE THOSE OF THE AUTHORS. NO RESPONSIBILITY FOR THEM SHOULD BE ATTRIBUTED TO INDUSTRY CANADA.

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Table of contents Abstract ..........................................................................................................................3 1. Introduction................................................................................................................4 2. Hypotheses: theoretical focus and empirical review .................................................7 3. Data and methodology .............................................................................................16 4. Results......................................................................................................................26 5. Summary of findings................................................................................................33 References....................................................................................................................35 Tables...........................................................................................................................37 Appendices...................................................................................................................47

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Abstract The primary objective of this paper is to determine how the downloading of music files through Internet peer-to-peer (P2P) networks influences music purchasing in Canada. P2P networks permit members to transfer digitally-stored information to one another over the Internet; popular examples include BearShare, LimeWire and eMule. Using representative survey data from the Canadian population collected by Decima Research on behalf of Industry Canada, we attempt to quantify this economic relationship, while accounting for other factors that influence music purchasing. We undertake a variety of econometric estimations for the population of Canadians who engage in P2P file-sharing (P2P “downloaders”), as well as for the whole Canadian population. To our knowledge, this is the first study on P2P file-sharing that analyzes original and representative microeconomic survey data from the Canadian population. Few previous studies have analyzed representative microeconomic data, for Canada or any other country. The existing literature identifies two competing effects associated with the P2P music file-sharing: the sampling and substitution effects. The sampling effect is characterized both by individuals downloading music in order to listen to it before buying it as well as by individuals downloading music that is not available in stores, while the substitution effect is characterized by individuals downloading music instead of purchasing it. In this paper, we further disentangle the sampling effect by adding a market segmentation effect, characterized by individuals engaging in P2P file-sharing because they do not want to purchase the entire bundle of songs on a CD. Our review of existing econometric studies suggests that P2P file-sharing tends to decrease music purchasing. However, we find the opposite, namely that P2P filesharing tends to increase rather than decrease music purchasing. Among Canadians who engage in P2P file-sharing, our results suggest that for every 12 P2P downloaded songs, music purchases increase by 0.44 CDs. That is, downloading the equivalent of approximately one CD increases purchasing by about half of a CD. We are unable to find evidence of any relationship between P2P filesharing...
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