Britney, the Chili Peppers, & the Economics of Music Downloading

There is an interesting new study on the economics effects of music downloading out from the National Bureau of Economic Research (NBER). Here is the summary:

Recording industry revenue has fallen sharply in the last three years, and some — but not all — observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as the consumers’ valuations of these albums, among a sample of US college students in 2003. We provide new estimates of sales displacement induced by downloading using both OLS and an instrumental variables approach using access to broadband as a source of exogenous variation in downloading. Each album download reduces purchases by about 0.2 in our sample, although possibly much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of Penn undergraduates, and we find that downloading reduces their per capita expenditure (on hit albums released 1999-2003) from $126 to $100 but raises per capita consumer welfare by $70.

In a nutshell, music downloading reduces people’s music spending, but it saves them lots of money. Now, where does that savings come from? The authors argue that $45 of the $70 comes from a more efficient music market, while “only” $15 is a direct transfer out of recording companies’ pockets. Interesting.

As a side note, the study also contains some fascinating & quirky data on people’s ex ante (before) and ex post (after) valuation of the music that they bought. Did they grow quickly tired of it? Did it meet (or exceed) expectations, or did it underperform? The results shows that the Red Hot Chili Peppers tended to lead in ex post valuations, with it generally exceeding expectations, while respondents who bought Britney Spears CD reported that they quickly grew tired of the thing.

If I get some time later today I’ll post the above data. It’s fun stuff.


  1. We also are up to our eyeballs with ways to get our music for free. In addition to file swapping, there are lots of streaming websites out there spinning 24×7. Music over satellite and cable TV now, too.