13
Sep
10

How Bad Is Music File Sharing? – Part 14

In his 2006 working paper Lee investigated how price and free music availability jointly affect the consumer’s willingness to buy and how price and non-price factors (rating of singers, genre preferences, number of songs on CDs, and music consumption style) change the “free” vs. “non-free” Internet availability conditions. The results of a survey of about 500 students of Korea University in Seoul indicate that there is a weak interaction of CD prices and free music availability, whereas in the non-free Internet availability situation price has a significant effect on consumer purchasing patterns for some CDs. More can be read here:

Lee tested in his study two hypotheses:

  1. The price of a CD and the free music availability will jointly affect consumers’ willingness to buy. The consumers’ willingness to buy will drop more quickly at a certain price point than at a point in the “non-free” Internet availability situation (Lee 2006: 10). The hypothesis implies that non-price factors affect the willingness to buy more than the price of a CD in “free” Internet availability situation.
  2. In the “non-free” Internet availability situation, price will have a greater effect on willingness to buy, while in the “free” Internet availability situation, non-price factors will have a greater effect on the willingness to buy.

In a first phase of the research, Lee conducted a pre-test in order to determine those factors, which might influence consumers’ purchasing patterns. In a survey of 106 students from Korean University in Seoul, Lee identified 4 factors affecting the purchase of CDs. The respondents had to list factors they consider when they purchase music. After redundancies were eliminated and similar responses were combined, the 4 factors were: price, rating of singers, genre preference, and the number of songs on a CD.

On this basis, the main research was conducted with 396 students of Korean University from middle-class households. In order to explore how file sharing affects the consumers’ purchase pattern, “free” Internet availability and CD-price were jointly manipulated. For the variable “price” Lee differentiated “very low price” (4,000 won = US$ 3.99), “low price” (7,000 won = US$ 6.99), “average price” (12,000 won = US$ 13.99), and “very high price” (19,000 won = US$ 20.99) for an average album. Each price was combined with a situation in which music is freely available on the Internet or not. This leads to 8 conditions, for which 12 music albums from 6 different genres (ballad, dance, R&B, rock, trot, and hip-hop) were described in the questionnaire. Participants were told that they would find 12 descriptions of different singers’ albums. The first task for the respondents was to rate the quality of the presented singer and the genre preference on a scale from 1 to 5. Next, respondents were asked to read three characteristics of the CD and then rate the extent to which they were willing to buy each CD on a 1 to 5 scale. In addition several demographic factors were collected including monthly expenditure, music consumption style, montly spending on CDs and time spent for free music consumption.

The results of the regression analysis indicate that there was no significant effect of the joint effect of price and “free” music availability, and, therefore, hypothesis 1 was not supported. However, the results also show that repondents who were willing to buy a CD at a certain price in the “non-free” situation show their unwillingness to purchase for the same price in a “free” situation because they started to perceive the CD as too expensive. Consumers, therefore, are unwilling to buy a CD at the current price because they are able to obtain the music for free on the Internet. Since the record labels set a profit maximising price for a CD, “(…) a consumer’s unwillingness to buy at that price would have a negative impact on record sales” (Lee 2006: 18).

Lee concluded that consumers put more weight on non-price factors than price in the “free” music Internet regime. A multiple regression analysis was conducted for the sample of 24 CDs with price, gender, age, monthly expenditure, monthly spending on CDs, and hours spend downloading free music as independent variables and willingness to buy as dependent one. The results of the regression analysis were assembled in two seperate situations: “free” and “non-free” music availability. The estimations show that price has a statistically significant effect on repondents’ willingness to buy for five out of twelve CDs in the “non-free” scenario, whereas in the “free” scenario price had no effect on consumers’ willingness to buy for any of the CDs. Therefore, hypothesis 2 – non-pice factors have a greater effect on the willingness to buy than price – was supported. Lee concluded “(…) that consumers would not consider price on purchasing CDs when they are able to obtain free music, and consequently consumers react less to price after the appearence of file sharing” (Lee 2006: 22).

Thus, the current price level for CDs is too high. The labels have to lower the price in order generate more demand. Moreover, lower prices could deter new entrants from the market. Instead of price setting, the labels should concentrate more on non-price factors such as various CD characteristics to attract consumers. In addition, according to Lee, new sale methods such as bundling must be developed to absorb low-value consumers by price discrimination policy. Otherwise, the labels will face further sales declines.

References:

Lee, Seonmi, 2006, The Effect of File Sharing on Consumer’s Purchasing Pattern. A Survey Approach. Working paper, University of Florida.

In part 15 Tin Cheuk Leung asked the question: “Should the Music Industry Sue Its Own Customers?”

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