“Selling out” and music piracy

Piracy is everywhere but in music artists’ supply. That’s the strong impression I get from the academic literature on the subject. There is evidence that piracy has reduced straight-up music sales revenue but overall it is unclear whether digitisation has impacted adversely on artist returns (because they make up losses with concert revenue and the like) or through lower distribution costs. But when it comes to piracy or music sharing, in general, Joel Waldfogel has convinced me that artists’ incentives to enter and supply quality music hasn’t been harmed and may have even been improved.

The natural interpretation of this is that artists don’t care about money: that is, they prefer fame over fortune. If that was the case then losing a source of revenue to piracy wouldn’t change their incentives to do what they do “for arts’ sake.” But the problem with that interpretation is that there are many artists, especially older and successful ones, who have been complaining about the impact of piracy on their royalty checks — a leader is Gene Simmons who has taken to the courts to protect his IP. If those artists are worried about money, surely it stands to reason that money will be a motive in the generation of new music.

Today I have released a new NBER Working Paper (or here for the SSRN version) that tries to reconcile these ‘stylised facts’: namely, that artists seem to care about money yet entry incentives haven’t been harmed by piracy. To do this, I assume that artists themselves do not act strictly rationally and are instead time inconsistent in a manner familiar to behavioural economics. Put simply, if music artists aren’t hyperbolic discounters I’m not sure who would be.

So how does that work? Basically, I suppose that music artists have their young selves and old selves. Their young selves take what they can get and don’t have many decision options. But their old selves get to make a choice between short-term fortune and long-term fame (i.e., going for music revenues today which limits their fan base and the benefits of that tomorrow). Piracy, if it is anticipated, reduces short-term fortune and, to the extent an artist wants that, they will be negatively impacted on by piracy. And a negative impact equals to a reduction in their incentives to create music.

Now there are two types of behavioural artists that could exist. The first are naive ones. These are artists who, when given a choice between short-run fortune and long-term fame will bias towards fortune. So, for them, piracy does actually reduce music revenues. The thing about the naive artists is that, when they are young, they do not anticipate making that trade-off and believe that, their future selves, will not “sell out.” So when anticipating piracy, they do not believe they will be impacted by it and so have unchanged incentives to enter the industry as young people.

The second types are sophisticated. Like the naive, when given a choice between short-run fortune and long-term fame will bias towards fortune and so piracy reduces music revenues. However, sophisticated artists realise when they are young that they will act this way. So they know they will not be able to earn as much as they would otherwise choose to do in the future. The twist here is that is a good thing. They are concerned about “selling out” and see piracy as a way of keeping their future selves as honest. So those artists would actually be more likely to enter the industry when they are young.

Thus, we can see how behavioural artists potentially “selling out” can rationalised observed reductions in music sales as a result of piracy with no negative consequences for music supply. Of course, it is just a theory and  it is not clear whether it plays a real role or not but it does suggest that our welfare concerns about piracy would be lower than a model with perfectly rational artists would predict. The paper also considers the role of publisher contracts in mediating these outcomes but that doesn’t change things too much.

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