Ever since the introduction of Napster, the impact of file sharing on the music industry has been the focus of intense debate. The availability of songs on file sharing networks has two competing effects on sales that are likely to vary across artists. First, there is a direct substitution effect on sales as some consumers download rather than purchase music. Second, there is a penetration effect which increases sales, as the spread of an artist’s works helps to make the artist more well-known throughout the population. The first effect is strongest for ex ante well-known artists, while the second is strongest for ex ante unknown artists. Thus file sharing reduces sales for well-known artists relative to unknown artists. Taking account of this heterogeneity in estimating the effect of file sharing provides strong evidence of this distributional effect. Additionally, I find a large aggregate negative effect on sales not apparent in previous work that failed to account for the differential impacts onmore and less well- known artists. The overall negative impact of file sharing arises because aggregate sales are dominated by sales of well-known artists. Using my estimates of the effect of file sharing, counterfactual exercises suggest that the lawsuits brought by the RIAA have resulted in an increase in album sales of approximately 2.9% during the 23 week period after the lawsuit strategy was publicly announced. Furthermore, if files available online were reduced across the board by 30%, industry sales would have been approximately 10%higher in 2003.
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