Piracy on the High C's: Music Downloading, Sales Displacement, and Social Welfare in a Sample of College Students

Recording industry revenue has fallen sharply in the last three years, and some -- but not all -- observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as the consumers' valuations of these albums, among a sample of US college students in 2003. We provide new estimates of sales displacement induced by downloading using both OLS and an instrumental variables approach using access to broadband as a source of exogenous variation in downloading. Each album download reduces purchases by about 0.2 in our sample, although possibly much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of Penn undergraduates, and we find that downloading reduces their per capita expenditure (on hit albums released 1999-2003) from $126 to$100 but raises per capita consumer welfare by $70.

Foreign Direct Investment and Exports with Growing Demand

We explore entry into a foreign market with uncertain demand growth. A multinational can serve the foreign demand by two modes, or by a combination thereof: it can export its products, or it can create productive capacity via Foreign Direct Investment. The advantage of FDI is that it allows for lower marginal cost than exporting does. The disadvantage is that FDI is irreversible and, hence, entails the risk of creating underutilized capacity in the case that the market turns out to be small. The presence of demand uncertainty and irreversibility gives rise to an interior solution, where the multinational, under certain conditions, both exports its products and does FDI.Foreign Direct Investment, Entry, Exports, New Markets

Piracy on the Silver Screen

New information technology has reduced marginal production and distribution costs of information goods to negligible levels and promises to revolutionize many industries. Unpaid copies of digital products can be as good as paid first-generation copies, and their availability can undermine the ability of sellers to cover first-copy costs. As a result, unpaid distribution has emerged as a major issue facing the music and movie industries in the past few years. Using survey data on movie consumption by about 500 University of Pennsylvania college students, we ask whether unpaid consumption of movies displaces paid consumption. Employing a variety of cross-sectional and longitudinal empirical approaches, we find large and statistically significant evidence of displacement. In what we view as the most appropriate empirical specifications, we find that unpaid first consumption reduces paid consumption by about 1 unit. Unpaid second consumption has a smaller effect, about 0.20 units. These estimates indicate that unpaid consumption, which makes up 5.2 percent of movie viewing in our sample, reduced paid consumption in our sample by 3.5 percent.

Reputation and Turnover

We consider a repeated duopoly game where each firm privately chooses its investment in quality, and realized quality is a noisy indicator of the firm’s investment. We focus on dynamic reputation equilibria, whereby consumers ‘discipline’ a firm by switching to its rival in the case that the realized quality of its product is too low. This type of equilibrium is characterized by consumers’ tolerance level - the level of product quality below which consumers switch to the rival firm - and firms’ investment in quality. Given consumers’ tolerance level, we determine when a dynamic equilibrium that gives higher welfare than the static equilibrium exists. We also derive comparative statics properties, and characterize a set of investment levels and, hence, layoffs that our equilibria sustain.Reputation, consumer switching, moral hazard, repeated games

R&D, Investment and Industry Dynamics

We present a model of industry evolution where the dynamics are driven by a process of endogenous innovations, followed by subsequent embodiments in physical capital. Traditionally, the only distinction between R&D and physical investment was one of labeling: the first process accumulates an intangible stock (knowledge) while the second accumulates physical capital; both stocks affect output in a symmetric fashion. We argue that the story is not that simple, and there is more to it than differences in the object of accumulation. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, which is supported by the data, also explains the observed higher volatility of physical investment (relative to R&D expenditures).

Learning and Capacity Expansion in a New Market Under Uncertainty

A competitive, dynamic model of entry into a new industry is set up and both its positive and normative properties are studied The main assumptions are that uncertainty with respect to its eventual size prevails and that later waves of entrants are able to observe how profitable earlier entrants had been. The major result reported is that the equilibrium rate of entry lags behind the optimum one.N/