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Introduction: The Economic Impact of Peer-to-Peer File Sharing on the Music Industry

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Peer to peer file sharing is normal for people who want to download music video and digital files. All over the world, this type of file sharing becomes popular as people can easily share it with personal computers. Many people do not know that it is illegal because most of the videos and songs are protected by law (Oberholzer-Gee and Strumpf, 2016). On the other side, there are people who think that sharing music is harmless and it impact on the economy. There are less number of people who are purchasing CD'S now as because they can easily download it from websites and peer-to-peer network. It leads to put an effect on the economy of the country. As economic studies have analyzed that sales are reduced because of the arrival of Napster which is one of the peer to peer sharing program who reduce sales approximately $6 billion in few years. Apart from this, there are many people who think that they suffer from loss due to peer to peer sharing but it has affected the entire music industry. On the other side, there are some ethical issues related to peer to peer sharing as it leads to affect the law of society. (Yang, Wang and Mourali, 2015). As per the code of ethics, it is strongly prohibited to download music which is copyright protected. Along with this, it is completely illegal to steal music of other artist without their permission. Due to this reason artist, much loose monetary compensation and music companies can suffer from loss. It also leads to create negative motivation to honest music buyers.


There is a huge negative impact of peer-to-peer file sharing on record sales. The argument of Liebiwtiz is based on the microeconomic theory because it identified 4 different effects of file sharing which can impact the record sales that are exposure, network effect, sampling, substitution and indirect appropriability (Belk, 2014). Impact of these entire factors are insignificant, if other consequence is positively interrelated with recorded sales. Along with this, there are many other factors which can affect record sales but they are cannot be explained.

Substitutional effect: The copy of music, videos and other is preserved as a substitute for the original. In case if the copy is identical or similar to the quality, and the cost of producing copy is low, the copy for the price of Zero dominates the original price positively. Hence it can be stated that unauthorised downloading of the file or music which is copyrighted then it can be substitute purchased original purchase and put a negative impact on sales (Borja, Dieringer, and Daw, 2015).

Penetration effect/exposure: Music is liked by most of the people and it is determined purchase pre-recorded music involves the cost of information, search cost etc. Hence it can be stated that customers should provided sample music so that they can make a decision of purchase. If music is allowed to be shared freely then it leads to reduction in sales. Files sharing lead to lower the cost and customers lead to become familiar with the date and artist. It is noticed that most of the consumers buy from the music and files from the legitimate distribution channel. Sampling put an unclear effect on the record sales (Hammond, 2014).

Network effect: There are many conditions where use of intellectual property leads to create additional value to the buyer of the original which is profitable for the firm from unauthorised use. There is great network effect in music consumption. Due to increase in music demand market size of music also enhanced.

Indirect appropriability: In this concept as the owner of copyright knows that their original files will be used for making copies (Belleflamme and Peitz, 2014). In such situation, they can keep higher price which allow them to capture high profit. If copying can be prevented then the owner can easily earn from the normal sales.

Supply: The availability of new recorded music

At the time of Napster, it leads to become difficult for producers to generate income from recorded music products. If the profit this revenue is generate

In the above diagram relationship can be noticed in a plot of the classic supply demand curve. The demand curve is set by the market. It shows the number of particular item which is purchased at any price. It is clearly noticed that in very rare case price of drop and item is demanded by the market. The supply curve is parallel. It shows number of items which are produced at the provided price. At the time when price increase more of the same item is produced. The market equilibrium price is that where two curves meet.

Artificial restraints on a free market.

An illustration is demonstrated where the local harmony point is altogether higher than the world market cost. In a free market at that point, the game-plan is buy the great from the world market and appreciate the advantages of the lower cost. In the end, accepting a flexible market, the two would come into balance and the creation of different merchandise would move to the zones most proficient in delivering them.

In any case, in this case, a levy misleadingly expands the cost. This drops the measure of the market from the interim [S1,C1] to the significantly littler interim of [S2, C2]. This implies the market is getting less and paying more for it. The pink regions in the diagram demonstrate the societal impacts of this childishness.

Presently music has a high beginning generation cost, yet once it's made, we should not kid ourselves; it is a non-rare great. If I somehow managed to duplicate a melody ten billion times, give a duplicate to each individual on the planet and shoot a couple off into space for good measure, it would not make any difference one whit. I haven't denied the proprietor of the first document of his or her property.

Their reaction is to endeavor to restrict duplicating, and along these lines the supply which would keep the supply-request harmony point as positive as they can make it. They are additionally campaigning for taxes to be set on all CDR circles and USB keys and are endeavoring to sue the jeans off anybody found filesharing. Every one of these endeavors serve to falsely control the supply-request balance point, and as the chart above shows, this prompts showcase wasteful aspects and disappointed clients.


From the microeconomic theory it can be clearly interpreted that peer to peer sharing has create huge negative impact on the music industry. Most of the people used to copy file from their friends and family member instead of purchasing it from shops.

Economic theory has provided a very few thin basics on which impact of file sharing on sales creates impacts on sales instead of negative impact (Oberholzer-Gee and Strumpf, 2016). Along with this from the microeconomic theory it is analysed that sales of sound recording are declining in the market. Firstly, prices which are adjusted for inflation was constant. Secondly, the recession of 2001 was only responsible for the decline in sales of music in the market. There was variation in income which unable to example the downturn in the record industry. Thirdly, revenue from video games, movie box etc did not change in the year 2000. There was an increase in the pre-recorded music (Yang, Wang and Mourali, 2015). However, there was no a substantial change in values and revenue and no reduction in the movability of music.


A peer to peer file sharing cannot be replaced music recreation but it can easily reproduce other original work. It leads to directly hurt the interest of artist and they may stop producing music anymore. It can be stated that peer to peer sharing can directly affect the interest of both artists as well as users. Record company should try to put up piracy through manipulating one of its main features that are its ability to make sure a large-scale dissemination of music at very low cost. If they are vertically integrated with the live music sector, the profit can be improved with the help of providing the option of downloading from the webpage. Barbara (2008) provided a multi-product monopoly model in which products would be located on the slop circle and customers regard the original superior copies. This microeconomic model reflects that peer-to-peer file-sharing network leads to upsurge in profit if there is adequate heterogeneity and product diversity.


Belk, R., 2014. You are what you can access: Sharing and collaborative consumption online. Journal of Business Research, 67(8). pp.1595-1600.

Belleflamme, P. and Peitz, M., 2014. Digital piracy (pp. 1-8). Springer New York.

Borja, K., Dieringer, S. and Daw, J., 2015. The effect of music streaming services on music piracy among college students. Computers in Human Behavior, 45, pp.69-76.

Hammond, R.G., 2014. Profit Leak? Pre‐Release File Sharing and the Music Industry. Southern Economic Journal, 81(2), pp.387-408.

Oberholzer-Gee, F. and Strumpf, K., 2016. The effect of file sharing on record sales, revisited. Information Economics and Policy, 37, pp.61-66.

Yang, Z., Wang, J. and Mourali, M., 2015. Effect of peer influence on unauthorized music downloading and sharing: The moderating role of self-construal. Journal of Business Research, 68(3), pp.516-525.


Barbara J. 2008., Economic Impact of P2P File Sharing available through ONLINE g

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