Dynamic Analysis of an Institutional Conflict: Copyright Owners against Online File Sharing
Pavlov, Oleg V., Journal of Economic Issues
Online music-sharing networks have been used by millions of people since they first appeared in 1999 (Leuf 2002; Associated Press 2004). The popularity of peer-to-peer (P2P) technology and the low-cost music distribution channel it created threaten the dominant position of a small number of large firms in the commercial music industry (Alexander 2002). Threatened by the possible restructuring of the entire industry in five to ten years (BBC 2002; Mann 2003), the dominant players responded with a fierce campaign against online copying. They oppose music-sharing networks on the grounds that the networks facilitate mass copyright infringement and erode industry's profits. This type of institutional response orchestrated by the incumbent economic players has precedents. Eighteenth century publishers in Great Britain resisted the emergence of public circulating Libraries (Roehl and Varian 2000), and Hollywood studios perceived video technology when it first appeared in the late 1970s as a threat to their movie revenues (Roehl and Varian 2000; Alexander 2002).
According to the Recording Industry Association of America (RIAA), which represents music copyright owners, online file sharing causes a significant decline in CD sales and erodes the financial incentives for the production of new material (RIAA 2003). Several research studies, however, suggest that online file sharing may not have a negative effect on the music market (Alexander 2002). In a widely publicized study, Felix Oberholzer and Koleman Strumpf (2004) compared directly observed data on CD sales and downloading. They concluded that "downloads have an effect on sales which is statistically indistinguishable from zero." The authors explained the result by noting that "most [P2P] users ... would not have bought the album even in the absence of file sharing." Contrary to the RIAA claims, file-sharing networks may have also increased the supply of music--the networks brought visibility to many "non-marketable" artists that could not use distribution channels controlled by the profit-seeking commercial music establishment (Gallaway and Kinnear 2001).
The commercial music industry pursues an offensive strategy comprising litigation, lobbying, and self-help (Yu 2003). Often testing the boundaries of legal and regulatory systems, the war against file swapping set off sharp and sagacious debates on the nature of intellectual property, the role of the copyright law, and fundamental notions of citizenry such as freedom of speech (Lessig 2001; Goldstein 2003; Green 2003; Amy Harmon and John Schwartz, "Music File Sharers Keep Sharing," The New York Times, September 19, 2003). Since institutions invariably affect the economy (North 1992), the outcomes of the polemics in courts will have considerable pecuniary consequences for the recording industry and the entire economy. New laws and new interpretations of old laws may cause new industries that are attempting to grow on the platform of peer-to-peer technology to flourish or decline (for examples see Non 2000 and Elkin 2002). But it is still not clear to what extent the recording industry can control the recalcitrant music networks (France and Grover 2003). Some analysts predict that peer-to-peer networks will ebb under pressure from the music industry, while other experts prophesize a continuous rise in popularity (BBC 2002). There also have been warnings that the true danger to the existence of file-sharing networks is not the belligerence of the music industry but the prevalence of free riding on P2P networks (Adar and Huberman 2000; Alexander 2002).
With this article I hope to add to the understanding of the institutional conflict within the commercial music industry. The framework for our analysis is rooted in the descriptive pattern modeling approach of institutional economics (Wilber and Harrison 1978). However, acting on a proposition that the traditionally narrative analysis of institutional economics may be buttressed by formal methods (North 1992; Hodgson 1998), I use the approach of institutional dynamics (Radzicki 1988, 1990a; Radzicki and Seville 1993) to build a resource-based model of a peer-to-peer community. …