Stardom, Peer-to-peer and the Socially Optimal Distribution of Music

Music industry is “facing the music” now. Big stakeholders try very hard to maintain their positions while other players see opportunities in the advent of peer-to-peer networks. Music, as a kind of representative information good, deserves its economic properties to be examined and made explicit. Using the familiar Hotelling (1929) model of product differentiation, I show that the current music distribution is inefficient and peer-to-peer file-sharing networks may be a solution. Further, I explain why big labels want to prevent the development of peer-to-peer networks and propose a market mechanism that improves the social welfare without endangering the artists’ incentive to create music. JEL Classification: L82