Microeconomics: Analysis of Supply, Demand, and the Music Industry

This report delves into the microeconomic principles of supply and demand, specifically in the context of the music industry and the impact of peer-to-peer file sharing. It begins by outlining the issues surrounding file sharing, including its legality and economic consequences, such as reduced CD sales and the rise of digital downloads. The analysis section applies microeconomic theory to explain the effects of file sharing, including the substitution effect, exposure, network effects, sampling, and indirect appropriability. The report examines supply and demand curves to illustrate market dynamics and discusses the impact of artificial restraints on the free market, such as copyright protections and the efforts of music companies to control supply. The position section argues that peer-to-peer sharing has a significant negative impact on the music industry based on microeconomic theory, and the critique section discusses the limitations of file sharing as a replacement for music recreation. The report also references academic research and provides a critical evaluation of the economic impact of file sharing and its implications for the music industry.

MICROECONOMICS -
SUPPLY & DEMAND
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TABLE OF CONTENTS
ISSUES ...........................................................................................................................................3
ANALYSIS......................................................................................................................................3
POSITION.......................................................................................................................................4
CRITIQUE.......................................................................................................................................1
REFERENCES................................................................................................................................1
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ISSUES
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.
ANALYSIS
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
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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
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Figure 1Demand and supply
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.
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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.
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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.
POSITION
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.
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CRITIQUE
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.
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REFERENCES
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.
Online
Barbara J. 2008., Economic Impact of P2P File Sharing available through ONLINE
ghttps://www.surfnetkids.com/tech/1389/economic-impact-of-p2p-file-sharing/
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