Monday, December 16, 2002

File trading's effect on price and quantity

A while ago I wrote how file trading effects the music industry will depend on what it does to the demand curve. Prices and quantities could go up or down. This lengthy paper (.pdf) looks at things in more details and concludes (tentatively) that file trading will reduce CD consumption by 20%-30% per capital (3.5 CDs/person/year). He also notes that quantity is falling while price is staying constant. This other post catalogs how investment in new music is falling (and erroneously says that is why sales fell--the opposite is almost certainly true) and that prices are rising slightly. So, coming back to the original post, the data suggests that file trading 1) makes the demand curve slightly more inelastic because more elastic customers are switching to mp3s and 2) record companies are responding by investing less in new bands. [Links via susupply and The Register.]

I, Cringely, has a fairly inane piece that begins well (make money off concerts) but then goes off the deep-end, suggesting record labels become VCs ("after all, they're both hit driven businesses"). Venture capitalists don't put money in risky ventures for fun, they do it because they can get profits out of it. File trading shifts profits to consumers, reducing a financier's incentive to back musicians. It may or may not reduce musicians' incentives to play, given that the chances of making any money in that business are about zero anyway.

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