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Network Effects of File Sharing on the Music Industry

When thinking about online file sharing one might initially assume it has a negative economic effect on those invested in creating or distributing music.  In reality the question is not so simple and researchers have not come to a consensus on the effect.  The cited paper discusses the relationship between file sharing and concert ticket sales, I will illustrate how file sharing could potentially have a beneficial effect on the incomes of those involved in the music industry.

 

When exploring for music, it’s hard to justify paying for a song if you’ve never heard of it before.  So for smaller, unheard of labels, the network effect of filing sharing is potentially huge for getting past barriers of entry.  Imagine someone who has never heard of song x.  If it costs 99 cents, they are unlikely to buy into it, the amount they value the song is likely fairly low as they’ve never heard of it.  However, if the song is free the cost amounts pretty much to the time it takes to download it, which is much more likely to be greater than their value of it.

 

In terms of larger labels, the network effect can also be beneficial.  The argument is whether the revenue lost from people that would have purchased songs of an artist who now get them from file sharing sites is larger than the revenue gained from people exposed to the song who will now purchase their merchandise/go to their shows.  Larger labels can potentially break into markets that they were previous blocked from by a barrier to entry and gain a large new fan base.

On File Sharing with Indirect Network Effects … – DICE

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