Microeconomics Report: Analysis of P2P File Sharing and Music Industry

This microeconomics report investigates the impact of peer-to-peer (P2P) file sharing on the music industry. It explores the controversies surrounding copyright violations and the difficulties economists face in determining the impact of file sharing on music company revenues. The report examines the effects of P2P technology on market demand and supply, including the closure of retail music stores due to reduced demand. It applies fundamental economic concepts like demand, supply, consumer surplus, and producer surplus to analyze the situation. The analysis considers assumptions about the relationship between music prices, CD purchases, and illegal downloads, highlighting the substitution effect between CDs and illegally downloaded music. The report uses diagrammatical representations to illustrate the changes in demand, supply, consumer surplus, and producer surplus within the context of P2P file sharing. It concludes by critiquing the arguments for and against P2P file sharing, acknowledging arguments related to quality and cost, while emphasizing the overall impact of the technology on the industry.

Running head: MICROECONOMICS
Microeconomics
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Author Note

1MICROECONOMICS
Table of Contents
Issues:.........................................................................................................................................2
Analysis:.....................................................................................................................................2
Position:......................................................................................................................................3
Critique:......................................................................................................................................4
References:.................................................................................................................................5

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Issues:
Through peer-to-peer (P2P) networking technology, people distribute and share
digital media under the process of peer-to-peer file sharing. In recent years, this sharing
technology has earned huge debates from different economical perspectives. According to
some economists, this process is economically significant as customers are paying money for
purchasing music albums through online. However, economical impact regarding copyright
violation within a music industry through peer-to-peer file sharing has remained controversial
(Askin and Mol 2018). Moreover, economists have also faced difficulties to determine impact
of this file sharing on the revenue of music companies. Based on some unofficial studies, it
can be said that file sharing has adversely affected this concerned industry by selling records
in an illegal way with a comparatively lower costs (Oberholzer-Gee and Strumpf 2016).
Moreover, for this technology, music industry has faced difficulties to analyse any trend
related to its demand and supply, for instance, the trend for purchasing a particular form of
music through legal sites cannot be determined under the existence of P-to-P technology. In
this context, it can also be mentioned that, due to this increasing number of peer-to-peer file
sharing technology, many retail music stores have closed their business for inadequate market
demand.
Analysis:
The situation of music industry can be described with the help of some fundamental
economical concepts like demand, supply, consumer surplus and producer surplus. According
to some research papers based on this issue, it can be said that the demand for music chiefly
depends on its price while some other factors can influence this, as well. For instance, other
factors like prices of related products, consumer’s tastes and income can influence the market
demand for recorded music significantly (Bacache-Beauvallet, Bourreau and Moreau 2015).
However, to measure the impact of P-2-P file sharing technologies on the market for recorded
music, some assumptions are needed to consider. Firstly, prices of recorded music have
negative relation with the number of C.D purchase. Secondly, prices of CD have a positive
relation with the demand for downloaded music through illegal P-to-P market sharing. Hence,
CD and illegally downloaded music can be said as substitute products. Thirdly, prices of
illegal music are low compare to the prices for recorded one. Last but not the least, demand
for illegal music have increased because people want to listen this freely before purchasing it
from market. Moreover, some people only prefer to listen to music by downloading it from
online sites. Those assumptions are drawn from the ethical arguments related to the music
industry (Leung 2015). On the other side, due to lack of demand for recorded music, many

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Price for illegal music
Price for recorded music
O Output Output
P0
P1
Q0 Q1
P
R1 R0
D0D1
D
S0
S1
A
B
C
E
F
stores have stopped selling CD, which in turn has decreased the supply of this recorded music
within the market. Consequently, prices for those products have increased. On the other hand,
consumers have successfully received ample amount of music with very limited price or even
freely. This in turn has helped these P-to-P file sharing services to increase its demand.
In this context, the concept of consumer surplus along with producer surplus can be
described. Consumer surplus measures the difference between price that a consumer wants to
pay for consuming the product and price that the concerned person is actually paying, which
is, market price (Waldfogel 2017). On the other side, producer surplus measures the
difference between price at which the person intends to supply it and the market price at
which the supplier is actually supplying it to the customers. As consumer can receive music
albums with comparatively cheaper prices through file sharing technology, they can receive
higher amount consumer surplus. On the contrary, producers can experience loss within
producer surplus due this lower price (Aguiar and Martens 2016). Those economical
phenomena can be described with the help of suitable diagrams.
Position:
Diagrammatical representations can help to support the above mentioned situation
appropriately.
Figure 1: Demand and supply curve of illegal music and recorded music
Source: (created by author)

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The figure 1 has represented demand and supply curves for both illegal music markets
and recorded music markets. Through P-to-P file sharing, supply of music has increased
significantly and this in turn has helped the price of illegal music to decrease further.
Consequently, market equilibrium for this product has increased from Q0 to Q1 while price
has decreased by P0 P1 (Handke, Balazs and Vallbé 2016). On the other side, demand for
recorded music has decreased by R0R1 unit at the given price P. This happens because at a
lower price, people demand more amount of illegal music and this in turn has decreased the
demand for its substitute item in the market.
The above figure can also determine the amount of consumer surplus and producer
surplus. According to this figure, initial amount of consumer surplus is the area of triangle
ABP0. However, after fall in price, this amount has become the area of triangle ACP1, which
is greater compare to previous one. From this, it can be said that consumers get more amount
of surplus. On the other side, producer initial amount of producer surplus is the area of
triangle EBP0 and after price change it become the area of triangle FCP1, which is greater
compare to the previous one. However, those sellers are related with file sharing market
while for actual producers, this amount o surplus has decreased due to higher price and
comparatively low demand.
Critique:
In this context of discussion, some arguments can also occur. For instance, people
may use P2P file sharing for listening to the music lower costs. If they like it, then they can
buy a recorded version of this music. In addition to this, some customers may find that
quality of illegal music is comparatively poor compare to the recorded one (Danaher et al.
2014). This situation leads the demand for recorded music to increase further. However, those
phenomena are not strong enough against the view of increasing demand for illegal music.
Shutting down of some music stores are the main example of this argument.

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References:
Aguiar, L. and Martens, B., 2016. Digital music consumption on the internet: evidence from
clickstream data. Information Economics and Policy, 34, pp.27-43.
Askin, N. and Mol, J., 2018. Institutionalizing Authenticity in the Digitized World of Music.
In Frontiers of Creative Industries: Exploring Structural and Categorical Dynamics (pp.
159-202). Emerald Publishing Limited.
Bacache-Beauvallet, M., Bourreau, M. and Moreau, F., 2015. Piracy and creation: The case
of the music industry. European Journal of Law and Economics, 39(2), pp.245-262.
Danaher, B., Smith, M.D., Telang, R. and Chen, S., 2014. The effect of graduated response
anti‐piracy laws on music sales: evidence from an event study in France. The Journal of
Industrial Economics, 62(3), pp.541-553.
Handke, C., Balazs, B. and Vallbé, J.J., 2016. Going means trouble and staying makes it
double: the value of licensing recorded music online. Journal of Cultural Economics, 40(3),
pp.227-259.
Leung, T.C., 2015. Music piracy: Bad for record sales but good for the iPod?. Information
Economics and Policy, 31, pp.1-12.
Oberholzer-Gee, F. and Strumpf, K., 2016. The effect of file sharing on record sales,
revisited. Information Economics and Policy, 37, pp.61-66.
Waldfogel, J., 2017. How Digitization Has Created a Golden Age of Music, Movies, Books,
and Television. Journal of Economic Perspectives, 31(3), pp.195-214.