Brett Danaher, Michael D. Smith, Rahul Telang
Last week we blogged about the peer-reviewed academic literature studying whether piracy harms sales, showing that articles in peer-reviewed journals overwhelmingly find that piracy causes harm to producers by reducing legal sales and revenues. In today’s blog, we will cover a second important policy question regarding piracy: Does piracy harm consumers?
In contrast to the first question, there is little evidence informing this question within the peer-reviewed literature. The reason it is more difficult to determine the effect of piracy on consumers is because there is a major difference between the short run and long run effects of piracy, and it is more difficult to identify and prove long run effects. In the short run, if we assume that the number and quality of creative works produced is fixed, then piracy benefits consumers in two ways. First, consumers who otherwise would have purchased the product at its normal price can now consume the product for free. Second, consumers who otherwise wouldn’t have purchased the product (because their expected value of the product was less than the price) can now consume products they wouldn’t have otherwise been willing to purchase.
But, although piracy may benefit consumers in the short run, it may harm them in the long run. If piracy reduces revenues to producers, economic theory suggests that producers will choose to supply fewer goods and invest less in quality. Does this effect show up in the data? Do consumers lose as a result of piracy? This is a very difficult question, because piracy appeared as a result of the digitization of media goods, and this digitization also brought with it a number of technologies that reduced the cost of producing, distributing, and promoting media products.
There is an established peer-reviewed literature demonstrating that the overall impact of digitization (which includes both piracy and all of these cost-saving technologies) has been to increase the number and appeal of products being offered (see, for example, Waldfogel 2012 and Waldfogel 2015). But this literature leaves unanswered the question of what piracy’s impact would be if it had not been accompanied by such large cost reductions. Would growth in media be higher if not for the revenue-cannibalizing effects of piracy? And does piracy have a redistribution effect on the supply of content?
We are aware of only two studies in the literature addressing these specific questions: Telang and Waldfogel (2014) and Danaher and Smith (2016). Telang and Waldfogel study Bollywood, the Indian film industry, from 1985-2000. They show that after 1985, VHS piracy coupled with a weak copyright regime led to significant reductions in the revenue that filmmakers could make per movie, even conditional on quality. During this time, Telang and Waldfogel show meaningful reductions in both the quantity of Bollywood films produced and the quality of those films, as measured by IMDB consumer reviews. Similarly, Danaher and Smith (2016) show that the number of Academy Award winning films from countries with high levels of piracy has diminished relative to films from countries where piracy has been less impactful. Thus, while not conclusive, the available empirical evidence seems to suggest that piracy may cause long-term harm to consumers by reducing the supply and quality of new content.
But there is one more important question regarding piracy: what types of firm strategies or government policies are effective in mitigating the negative impact of piracy on revenues? We will tackle that question next in a third and final blog post on this subject.
References
Danaher, B., M. Smith. 2016. Digital Piracy, Film Quality, and Social Welfare. Working Paper, Carnegie Mellon University, Pittsburgh, PA.
Telang, R., J. Waldfogel. 2014. Piracy and New Product Creation: A Bollywood Story. Working Paper, Carnegie Mellon University, Pittsburgh, PA.
Waldfogel, J. 2012. “Copyright Protection, Technological Change, and the Quality of new Products: Evidence from Recorded Music Since Napster.” Journal of Law and Economics, Vol. 55 No. 4, pp. 715-740.
Waldfogel, J. 2015. “Cinematic Explosion: New Products, Unpredictability, and Realized Quality in the Digital Era.” Forthcoming, Journal of Industrial Economics.
Michael D. Smith is a Senior Adjunct Fellow at Technology Policy Institute. He is also a Professor of Information Systems and Marketing and the Co-Director of IDEA, the Initiative for Digital Entertainment Analytics at Carnegie Mellon University. He holds academic appointments at Carnegie Mellon University’s School of Information Systems and Management and the Tepper School of Business. Smith has received several notable awards including the National Science Foundation’s prestigious CAREER Research Award, and he was recently selected as one of the top 100 “emerging engineering leaders in the United States” by the National Academy of Engineering. Smith received a Bachelors of Science in Electrical Engineering (summa cum laude) and a Masters of Science in Telecommunications Science from the University of Maryland, and received a Ph.D. in Management Science from the Sloan School of Management at MIT.
