|About the Data
|In the model profits increase for a certain set of parameters because consumers can make more informed purchasing decisions because of sampling and are willing to spend for the original although they could consume the download for free.
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Downloading digital products for free may harm creators and intermediaries because consumers may no longer buy the version for sale. However, as we show in this paper, this negative effect may be overcompensated by a positive effect due to sampling: consumers are willing to pay more because the match between product characteristics and buyers’ tastes is improved. This indeed holds under sufficient taste heterogeneity and product diversity.
We present a simple multi-product monopoly model in which products are located on the Salop circle and in which consumers regard each original as superior to its copy. We first consider a model with unit demand and full participation so that any increase in revenues stems from higher prices. The property that sampling allows consumers to find a better match to their tastes, tends to lead to higher profits under file-sharing. However, there is a countervailing effect: consumers have the option to download and listen to music without paying for it. In other words, consumers have the option to simply keep the download but not to buy the song or album. This tends to make not buying a more attractive option and tends to reduce the willingness-to-pay for music. We show that the former effect dominates the latter and that the introduction of file-sharing technologies leads to higher profits if there is
sufficient taste heterogeneity and sufficient product diversity. We then extend the model to allow for variable demand and show that file-sharing can lead to lower prices, higher unit
sales and higher profits
Main Results of the Study
Do music labels necessarily suffer from downloading on P2P networks? Our analysis shows that the answer is 'no'. In our model, profits increase for a certain set of parameters because consumers can make more informed purchasing decisions because of sampling and are willing to spend for the original although they could consume the download for free.
Policy Implications as Stated By Author
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