Music piracy: Bad for record sales but good for the iPod?

Music piracy is a double-edged sword for the music industry. On the one hand, it hurts record sales. On the other hand, it increases sales of its complements. To quantify the effect of music piracy, I construct a unique survey data set and use a Bayesian method to estimate the demand for music and iPods, and find three things. First, music piracy decreases music sales by 24% to 42%. Second, music piracy contributes 12% to iPod sales. Finally, counterfactual experiments show that Apple’s revenue could increase by $36 per student if music were free. ∗I am indebted to my advisor Pat Bajari for his continuous encouragement and support. I have benefited from the suggestions of Tom Holmes, Kyoo il Kim, Om Narasimhan, Minjung Park, Amil Petrin, Hakki Yazici, and seminar participants at Bates White, CUHK, Colby College, Columbia University, the Federal Reserve Bank in Kansas City, HKUST, and the University of Minnesota. I also thank Dulguun Batbold, Andrew Cassey, John Dalton, Tom Holmes, Nick Guo, Christos Ioannou, Ka Fai Li, Mallory Leung, Tina Marsh, Connan Snider, and Junichi Suzuki for their help in conducting the survey. Lastly I am grateful to the Economics Department of the University of Minnesota for financial support. The usual disclaimers apply. Correspondence to: [email protected]