From Music Row Law, a review of two studies now supporting the view that P2P downloading actually increases sales of physical media; the downturn in CD sales through music stores is thus a result of other factors (such as the rise of Walmart).

I remain skeptical. In analyzing this data, assumptions are key. Many other studies show harm.

The earlier study, by Strumpf, professor of business economics at the University of Kansas Business School and Felix Oberholzer, seemed to operate on some peculiar assumptions (one being that downloads of popular tunes have the same impact on sales as downloads of more obscure ones). However, their data is not available for re-analysis.

Stan Leibowitz has a concise critique of the Canadian study as well as a paper in the Journal of Law & Econ. His use of data is extremely careful.

Among other things, he concludes:

All the papers that I have seen by other economists, except for one notable exception, find some degree of harm (to record producers) caused by file-sharing. These include papers by Blackburn, Hong, Michel, Peitz and Waelbroeck, Rob and Waldfogel and Zentner. The lone exception, but the most heavily publicized, is a paper by Oberholzer-Gee and Strumpf, which I believe is littered with errors and disingenuousness as discussed in greater detail below.

His critique of the Canadian study notes:

The result that has attracted the most attention comes from this quote from the A/F report: “Among Canadians who engage in P2P file-sharing, our results suggest that for every 12 P2P downloaded songs, music purchases increase by 0.44 CDs.” Since there are 14 songs on a typical CD, this means that for each CD equivalent of song downloaded, sales of CDs would increase by one half of a CD.

To arrive at this conclusion the authors limit their sample to only those who download music from peer-to-peer sites. Limiting the sample in this way seems nonsensical. When we test the efficacy of a drug we compare those who take the drug with those who do not. If we limited our observations to only those users who take the drug we would be giving up our most useful and important information. It is possible that dosage differences across users might still provide some information about the overall impact of the drug, but the most important information is whether the drug, at any reasonable dosage, causes a change compared to no drug at all...

Our interest is in the CD purchase behavior of consumers and the ‘treatment’ is peer-to-peer downloading. The best test for that is to compare the group that downloads with peer-to-peer against the group that does not download. ...

A/F have since responded that they do not have a controlled experiment, such as that above, and imply that somehow that changes the logic of the above example. It does not. If we were to examine the impact of tobacco smoking we would compare the smokers to the non-smokers even though it is not a controlled experiment. In fact, this is how the studies were done. It would be illogical to examine only smokers. So A/F still need to provide a cogent explanation for their decision.

Although I am not sure whether A/F report this statistic, the average number of files downloaded from peer-to-peer networks in their sample of downloaders is 30 (24 -- weighted values are in parentheses) files per month (the data are publicly available here). This is the equivalent (in terms of the number of tracks) of 26 (20) CDs per year. According to the A/F quote reported above, this would mean that the average downloader increases their purchase of CDs by 14 (10) units per year. Yet the same data indicate that downloaders only purchase an average of 9 (6) CDs per year. Thus, A/F’s reported result is impossible since downloaders cannot have increased their consumption by 14 (10) units and yet, after this increase, only consume 9 (6) CDs per year.

For more, see his home page.

posted by Solveig Singleton @ 8:48 AM | Economics, Game Theory & Public Choice, Internet: P2P, Search Engines..., Media: Video, Music...

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