In April 2006, Alejandro Zentner published in the Journal of Law and Economics an article entitled “Measuring the Effect of File Sharing on Music Purchases”, which was based on his dissertation of the same titel, published the year before. Originally Zentner presented the results in a 2003 working paper, and a 2005 article in Topics in Economic Analysis and Policy was also be based on these findings. The results of the study suggest that “(…) peer-to-peer usage reduces the probability of buying music by 30%.” This means that “(…) sales in 2002 would have been around 7.8 percent higher.” (Zentner 2006: 63).
The study used a European consumer mail survey by Forrester Research from October 2001, which is representative for 7 European countries (France, Germany, Italy, Netherlands, Spain, Sweden and the United Kingdom), whose combined market share accounted for 27.8% of the world music purchases in 2001. The dataset contained information on music purchases (CDs, tapes, or vinyl records) during the month prior to the survey. It also provided information on Internet access, the purchases of many goods such as videos, books, and software, ownership of electronic goods such as portable stereos, hi-fi stereos, cell phones, DVD players, MP3 players, CD writers, and games consoles, as well as several demographic variables. The dataset contained information on the average number of hours per week spent online and the number of years a respondent had been online, as well as information on Internet activity such as checking e-mail, using search engines, publishing websites, participating in online auctions, and of course downloading MP3-files. Also the database included information on the type of Internet access – DSL, cable, ISDN or dial-up –respondents used.
Descriptive statistics showed that overall 39.3% bought music the month prior to the survey, 9% regularly downloaded MP3 files and 51% had Internet access. The percentage of repondents who purchased music was much larger among the group of downloaders than among the group of non-downloaders. Considering only those people who had Internet access, the study showed that 47.1% purchased music in the last month and 21% regularly bought MP3 downloads. And again, the fraction of people who bought music is higher among regular downloaders (55.0%) than among those who did not.
Although the positive relationship of downloading on music purchases persisted when controlling for many individual level characteristics, Zentner needed an instrument variable, which accounts for the presence of unobserved heterogenity, i.e. unobserved taste of music. Broadband access was the first instrument variable, which Zentner used. He showed that it significantly increases the probability of downloading music. The results of the regression, therefore, suggested a reduction of nearly 50% in the probability of buying music (Zentner 2006: 77). However, Zentner also admitted that broadband access does not necessarily relate to the interest of downloading music. Nevertheless, he used this instrument and implicitely assumed that people with a broadband connection have a strong taste for music. Since the author was sceptical of broadband access as an instrument for downloading, he also used Internet sophistication as an instrumental variable. Zentner found several variables in the database indicating Internet sophistication; however, only the publishing of one’s own webpage, reading computer magazines, participating in online auctions and asking for technical support online had a significantly positive impact on the probability for people to download music.
On the basis of this analytical framework, the results indicated “(…) that downloading MP3 files online reduces the probability of buying music during the month prior to the survey by 30 percent” (Zentner 2006: 85). However, the dataset did neither contain information on quantities of music purchased nor on intensities of music downloads. Therefore, it was not directly possible to calculate the impact on record sales as indicated in the journal’s article. Instead, Zentner relied on several assumptions to conclude: “[I]f 15 percent of the population downloads music, if downloaders are twice as likely to buy music than nondownloaders, and if – conditional on buying – downloaders and nondownloaders buy the same quantity of units, then sales in 2002 would have been 7.8 percent higher” (Zentner 2006: 86).
Zentner, Alejandro, 2003, Measuring the Effect of Online Music Piracy on Music Sales. Working paper, University of Chicago.
Zentner, Alejandro, 2005a, “File Sharing and International Sales of Copyrighted Music. An Empirical Analysis with a Panel of Countries.” Topics in Economic Analysis and Policy, Vol. 5, article 21: 1-17.
Zentner, Alejandro, 2005b, Measuring the Effect of File Sharing on Music Purchases. Ph.D. dissertation. University of Chicago, Department of Economics.
Zentner, Alejandro, 2006, “Measuring the Effect of File Sharing on Music Purchases”. Journal of Law and Economics, Vol. 49, No. 1 (April 2006): 63-90.
In the next part I will discuss Wendy Chi’s paper: “Does File Sharing Crowd Out Copyrighted Goods?”.