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Selling Digital Music: Business Models for Public Goods

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  • Jens Leth Hougaard

    (Department of Food and Resource Economics, University of Copenhagen)

  • Mich Tvede

    (Department of Economics, University of Copenhagen)

Abstract

This paper considers the market for digital music. We claim that the combination of the MP3 format and peer-to-peer networks has made music non-excludable and this feature is essential for the understanding of the economics of the music market. We study optimal business models for selling non-excludable goods and show that despite promising theoretical results, adding just a slight uncertainty about the number of customers has significant negative implications for profitability. Indeed, as the average number of customers tends to infinity the average payment per customer converges to zero. Therefore, the music industry should concentrate on alternative ways of creating profit such as selling access to listeners, concerts, merchandise, ringtones etc.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 09-19.

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Length: 23 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:kud:kuiedp:0919

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Keywords: digital music; experience good; public good; music industry; piracy;

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  1. Sudip Bhattacharjee & Ram D. Gopal & Kaveepan Lertwachara & James R. Marsden & Rahul Telang, 2007. "The Effect of Digital Sharing Technologies on Music Markets: A Survival Analysis of Albums on Ranking Charts," Management Science, INFORMS, INFORMS, vol. 53(9), pages 1359-1374, September.
  2. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1247-57, November.
  3. Kathleen Reavis Conner & Richard P. Rumelt, 1991. "Software Piracy: An Analysis of Protection Strategies," Management Science, INFORMS, INFORMS, vol. 37(2), pages 125-139, February.
  4. Peitz, Martin & Waelbroeck, Patrick, 2004. "An Economist's Guide to Digital Music," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 32, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 345-61, March.
  6. Boldrin, Michele & Levine, David, 2002. "The Case Against Intellectual Property," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3273, C.E.P.R. Discussion Papers.
  7. Takeyama, Lisa N, 1994. "The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 155-66, June.
  8. Felix Oberholzer-Gee & Koleman Strumpf, 2007. "The Effect of File Sharing on Record Sales: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 1-42.
  9. Peitz, Martin & Waelbroeck, Patrick, 2006. "Piracy of digital products: A critical review of the theoretical literature," Information Economics and Policy, Elsevier, Elsevier, vol. 18(4), pages 449-476, November.
  10. Mailath, George J & Postlewaite, Andrew, 1990. "Asymmetric Information Bargaining Problems with Many Agents," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 351-67, July.
  11. Peitz, Martin & Waelbroeck, Patrick, 2006. "Why the music industry may gain from free downloading -- The role of sampling," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(5), pages 907-913, September.
  12. Bagnoli, Mark & Lipman, Barton L, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(4), pages 583-601, October.
  13. Novos, Ian E & Waldman, Michael, 1984. "The Effects of Increased Copyright Protection: An Analytic Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(2), pages 236-46, April.
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