The objective of Brigitte Andersen and Marion Frenz’s study entitled “The Impact of Music Downloads and the P2P File-Sharing on the Purchase of Music”,(2007/08), which was later published in the Journal of Evolutionary Economics under the title “Don’t blame the P2P file-sharers: The Impact of Free Music Downloads on the Purchase of Music CDs in Canada” (2010) was to determine how the downloading of music files through P2P networks influences music purchases in Canada. They used data from a representative survey of the Canadian population aged 15 and older collected by Decima Research for Industry Canada, in which 2,100 repondents were also asked how many CDs and non-physical music tracks they purchased in the last two months and how much they paid for it on average. They show in their paper “(…) that P2P file-sharing is not to blame for the decline in CD markets. Music markets are not simply undermined by free music downloading and P2P file-sharing, due to the sampling effect” (2010: 735).
In contrast to other studies, which differentiate only a substitution and sampling effect of file sharing on music sales/purchases, Andersen and Frenz’s paper considers more ways in which music can be acquired: purchasing CDs, ripping CDs, buying music tracks, downloading free music from file-sharing networks, downloading free music from promotional websites and from peoples’ private sites and copying MP3s from friends. Therefore, the sampling effect was divided into a “market creation effect” and “market segmentation effect”. “Market creation” means that an individual shares music files in order to hear a particular song before buying it. This effect is distinct from the effect of “market creation”, which refers to a situation where the music is not available in stores or from online/mobile music shops. Beside these effects, there is also a “market segmentation effect”, which refers to the phenomenon of cherry-picking, i.e. an individual not wanting to pay for the whole album and instead downloading the desired music track for free. In contrast, the substitution effect refers to a situation in which the individual engages in music file sharing because the song or album price is considered too high.
The hypotheses were then tested with the help of a regression model, in which the dependent variables were the number of CD albums and number of online/mobile music tracks that respondents estimated they had purchased in 2005. According to the regression results, the authors were unable to find direct evidence for the hypothesis that “file sharing is negatively associated with music purchases in Canada”. Quite the contrary, they found “(…) a positive and statistically significant relationship between the number of music tracks downloaded via P2P networks and the number of CDs purchased. (…) For an increase in the average number of P2P downloads per month of 1, the number of CD purchases per year will increase by 0.44.” (Andersen and Frenz 2007: 27). However, in the later version the results were modified. They now argued that the sampling and substitution effect “(…) ‘cancel’ one another out, leading to no association between the number of P2P files downloaded and CD album sales” (2010: 715).
Andersen/Frenz also evaluated the sampling and substitution effect of file sharing on music purchases. On the basis of the regression results, they calculated a substitution effect of 3.2%, meaning that if an individual increases his P2P file sharing activity by 1% he purchases 3.2% fewer CDs. For the “market segmentation effect” the authors could not find any relationship between file sharing and CD purchasing. Also, with the “market creation effect” no statistically significant impact on CD purchases could be observed. However, tests for both the entire market creation effect versus the market substitution effect and the combined market creation and market segmentation effect versus the market substitution effect showed a significant difference at the 1% significance level. Therefore, the authors concluded “(…) that the negative CD ‘market substitution effect’ is balanced out by the much more positive overall ‘market creation’ effect from P2P file-sharing” (Andersen and Frenz 2007: 29).
Andersen, Brigitte and Marion Frenz, 2010, “Don’t Blame the P2P File-Sharers: The Impact of Free Music Downloads on the Purchase of Music CDs in Canada”. Journal of Evolutionay Economics, vol. 20, pp. 715-740.
In the next part of series “How Bad Is Music File Sharing?” Jordi McKenzie’s study on the impact of music file sharing on chart success in Australia will be discussed.