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are, of course, bad. They raise prices
and restrict output. Beyond that, they
either transfer resources from buyers
to sellers, or worse, they employ high
prices that frustrate mutually beneficial transactions. Why do governments grant these monopoly rights?
It provides an incentive for creative
Napster illustrates that copyright’s
effectiveness depends crucially on
technology. While the recent technological challenge to copyright could
have affected any product that can be
digitized—text, audio, or video—in reality the recorded music industry was
the first to face the new challenge. And
the decade since Napster has seen a
dramatic reduction in revenue to the
recorded music industry.
The struggles of the recorded music industry have spawned an outpouring of research seeking to document
the effect of file sharing on the recording industry’s revenue. Organizations
representing the recording industry
have argued that piracy is the cause
of the reduction in revenue they have
experienced. They further claim that
their experience foreshadows in other creative industries, and that it will
have serious consequences for bringing artists’ work to market.
What Do We Know?
While the question of whether file
sharing displaces legal sales and weakens copyright is interesting—and a vital question for industry—it is clearly
not the only question raised by file
sharing. Copyright has traditionally
allowed the recording industry to generate revenue from recorded music.
Weakened copyright may be bad news
for sellers of recorded music, but its
consequence for consumers depends
on what is arguably more important:
Does piracy slow
from being brought
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whether new music continues to be
made available. In this column, I consider these issues in more detail.
Although stealing has long been
understood to be bad, the effects of
stealing on the sellers of products produced with zero marginal costs (the
additional cost required to make one
more unit available) are somewhat
subtle. To see this, first consider the
analysis of stealing music that has already been recorded. There are two
separate questions: whether stealing
harms sellers and whether stealing
harms society as a whole.
The effects of stealing on sellers
depend on its effects on consumers,
who differ in their willingness to pay
for the product. Some attach valuations high enough so that, had stealing been impossible, they would instead have purchased the product.
When they steal, each unit of theft
reduces paid consumption by one entire unit. Thus, their stealing harms
But other consumers attach lower
valuations to the product. If stealing
had been impossible, they would not
have purchased the product. When
they steal, it brings about no reduction
in revenue to the traditional sellers.
Summarizing, does stealing harm
sellers? It depends on whether the
instances of unpaid consumption
would otherwise have generated
sales. That also explains why sellers
and society should not view stealing
the same way. When low-valution
consumers steal, their theft does not
harm sellers. But their consumption
does generate a gain that otherwise
would not have occurred.
This is society’s paradox of piracy.
If stealing could somehow be confined
to these circumstances, then its effects would help consumers without
harming producers. Generally, it cannot, and that is why the revenue reduction experienced by sellers can have
long-term consequences beyond their
direct losses. Indeed, because new
products need some threshold level of
revenue in order to be made available
profitably, transfers from producers to
consumers are not benign.
The need to cover costs motivates the
biggest unanswered question in this