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\begin_body
\begin_layout Title
What Does Undergrad Micro Theory Say about Music Downloading
\end_layout
\begin_layout Author
Michael Peters
\end_layout
\begin_layout Date
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today
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\begin_layout Quotation
\begin_inset Quotes eld
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Most of us would never even consider stealing something, say a picture or
a piece of clothing from a friend's house.
Our sense of right and wrong keeps most of us from doing something so selfish
and antisocial.
Yet when it comes to stealing digital recordings of copyrighted music,
people somehow seem to think the same rules don't apply even though criminal
penalties can be as high as five years in prison or $250,000 in fines.
Contrary to popular opinion, illegally downloading or copying copyrighted
music is the same as stealing; there is no difference.
\begin_inset Quotes erd
\end_inset
- Christian Music Trade Association (www.cmta.com)
\end_layout
\begin_layout --Separator--
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\begin_layout Quotation
\begin_inset Quotes eld
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No, I'd say that of the world's economies, there's more that believe in
intellectual property today than ever.
There are fewer communists in the world today than there were.
There are some new modern-day sort of communists who want to get rid of
the incentive for musicians and movie makers and software makers under
various guises.
They don't think that those incentives should exist.
\begin_inset Quotes erd
\end_inset
- Bill Gates Cnet interview (news.com.com/Gates taking a seat in your den/2008-10
41 3-5514121.html)
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\begin_layout Quotation
\begin_inset Quotes eld
\end_inset
Because of the ad skips....
It's theft.
Your contract with the network when you get the show is you're going to
watch the spots.
Otherwise you couldn't get the show on an ad-supported basis.
Any time you skip a commercial or watch the button, you're actually stealing
the programming.
\begin_inset Quotes erd
\end_inset
- Jaimie Kellner, CEO Turner Broadcasting
\end_layout
\begin_layout --Separator--
\end_layout
\begin_layout Quotation
\begin_inset Quotes eld
\end_inset
Music is everybody's possession.
It's only the publishers who think people own it.
\begin_inset Quotes erd
\end_inset
- John Lennon
\end_layout
\begin_layout Standard
Despite the righteousness of the Christian Music Association, there is an
important difference between a picture or a piece of clothing and a music
file.
When you steal a picture or a sweater of mine, I don't have them anymore.
\begin_inset space \space{}
\end_inset
If you download a file from my computer, you can't diminish my enjoyment
of the same song on the same file at all.
Neither do I hurt you in any way if I copy a software program from your
computer, or watch the same TV show as you.
No matter how rhetorically attractive this sounds to a music company's
lawyers, you can't steal digital music or a television show.
Whether or not we want to stop 'piracy' is an economic issue not a moral
one.
\end_layout
\begin_layout Standard
Courts -- especially in the United States -- have supported large corporations
who have tried to sue file swappers.
This hasn't apparently had much impact on file sharing in general, but
has shutdown websites associated with file sharing; for example, Napster
is long gone, though it has resurfaced from time to time trying to sell
music.
Pirate Bay is in an apparently endless process of begin shut down then
starting up again at a different location (as this is written it is Ascension
Island (thepiratebay.ac).
Canada's best know (even iconic) bittorrent site isohunt.com has shut down
after agreeing to pay the RIAA $110 million dollars.
The motivations of the Recording Industry Association of America (RIAA)
are clear in trying to close these websites: they feel that most people
who download music over the Internet would pay the record company if they
could not get the song for free.
It seems the American courts agree with this and feel the recording companies
are entitled to their money.
\begin_inset Foot
status open
\begin_layout Plain Layout
Jammie Thomas was sued by the RIAA in 2006 for downloading 24 songs.
After 6 years of litigation, she was found liable and fined $220,000 dollars
(http://www.guardian.co.uk/technology/2012/sep/11/minnesota-woman-songs-illegally-
downloaded).
Joel Tennenbaum, a Boston area graduate student, downloaded 30 songs and
was fined $675,000.
\end_layout
\end_inset
\end_layout
\begin_layout Standard
Since only communists -- according to Mr.
Gates -- could possibly disagree with strong copyright legislation being
applied to music and software, you might expect simple microeconomic theory
to make all of this pretty easy to understand.
In particular, basic micro theory -- as it is currently taught in, say,
second-year university courses -- must show why copyright is such a fundamental
part of capitalist economics.
It would also be nice to have this explanation in a form that could be
freely downloaded using bittorrent instead of paying a lot of money to
a publisher.
This short article is the result.
\end_layout
\begin_layout Standard
The bottom line is the same as it often is in economics.
Strong copyright legislation might be beneficial and it might be extremely
harmful.
It benefits some people greatly, and hurts others.
Finally, `strong copyright' always comes with a cost.
As it is implemented in the US, copyright implies monopoly.
Monopoly power will typically be used to restrict output and make it difficult
for competitors to enter.
In this sense, copyright must always work against the provision of music
and software at the same time that it works for it.
Whether copyright is good or bad depends on whether the monopoly effect
is bigger or smaller than any incentive effect.
This will vary with the product involved, so copyright may be good for
music and bad for software or conversely.
\end_layout
\begin_layout Standard
The first part of this reading simply shows the basic logic behind copyright
as applied to music downloading.
When a musician creates a piece of music, one of the ways that people enjoy
that music is by listening to recordings.
The music companies used to produce albums and cds containing those recordings,
and consumers would pay a lot of money for them.
According to Rolling Stone magazine, physical cds sell for around $18.
About $10 of this money goes to the record label, about $2.00 goes to the
artist who recorded the music.
It isn't hard to see why the record labels would want to keep this cushy
arrangement going, even though cds are now obsolete.
A more modern way to purchase music is to buy it on iTunes.
Lobbying and the US court system still allow the record labels to do pretty
well.
When a consumer buys (or rents or whatever it now amounts to) a $1.28 song
on iTunes, the record label gets $0.60 and the recording artist only $0.02.
But Apple takes $0.40 out of this.
If you bought 12 songs from iTunes, you would pay about the same thing
you would pay for a physical cd - which is a bit surprising given it is
so much cheaper to offer digital files.
You may also be surprised to learn that you don't actually own your iTunes
collection (or for that matter, any of the eBooks you might have thought
you purchased).
The fee you pay to Apple is just a license fee that gives you access to
the songs, and this license isn't transferable.
You can't donate your eBooks or mp3 files to the library, or give them
away.
You might wonder why Apple and a recording label get such a big chunk of
money for restricting your access to a musical recording.
\end_layout
\begin_layout Standard
From my perspective, the music downloading problem is a nice way to illustrate
the principles behind public goods.
I'll describe the public goods problem using a 'common agency' model that
is popular in the microeconomics literature.
I'll relate this back to the older models involving Lindahl pricing and
voluntary contributions games.
We can use the approach to think about the distributional consequences
of copyright protection and the role of the RIAA.
\end_layout
\begin_layout Standard
As you will see, it is possible that musicians left to their own accord
will produce too little music.
At a theoretical level it is equally plausible that musicians will produce
exactly the right amount of music without any copyright protection at all.
Which of the two possibilites is true is an empirical issue which can't
be decided by theory alone.
\end_layout
\begin_layout Standard
However, it is bound to be true that strong copyright protection that can
be sold to record companies makes it possible for these companies to restrict
output, prevent entry and redistribute surplus (to themselves mostly).
The main problem with copyright legislation is that it grants monopoly
powers to the copyright holder.
If the copyright holder then tries to maximize profits, he or she will
restrict output and raise price, which partly (or possibly completely)
defeats the purpose of the copyright legislation in the first place.
Of course, no musician really wants to restrict the number of people who
listen to his music.
Yet, he will typically sell the copyright to a corporation who has exactly
this intention in mind.
These costs associated with monopoly power must be weighed against the
incentive effects of copyright before the public interest can be determined.
\end_layout
\begin_layout Section
What is Wrong with Leaving Things Alone
\end_layout
\begin_layout Standard
Let's start with a situation where everyone is left to their own devices:
musicians make music, everybody else does what they do.
Musicians aren't going to disappear because people download music files.
Some people argue that musicians like file sharing because it gives more
visibility to their music.
\end_layout
\begin_layout Standard
Our story will eventually involve four interested parties, two music consumers,
a musician, and a record company.
The musician produces music from her endowment
\begin_inset Formula $\omega^{m}$
\end_inset
according to a linear technology.
In particular, each unit of her endowment that the musician spends on music
production produces exactly 3 units of music.
You can think of a unit of music here as a recording.
The more of her endowment that the musician spends making music, the more
recordings she makes.
For notation, lets use
\begin_inset Formula $y$
\end_inset
to represent the number of recordings the musician makes.
We'll use
\begin_inset Formula $x$
\end_inset
to represent the musician's consumption of other stuff and assume that
the musician, like the two consumers, has utility function
\begin_inset Formula
\[
u\left(x,y\right)=x+\ln\left(y\right).
\]
\end_inset
\end_layout
\begin_layout Standard
The fact that the consumer hears the music for free doesn't mean he won't
pay the musician.
The consumers will go to the musicians performances and pay for tickets,
t-shirts, beer, and even cds that the musician sells at her concerts.
Lets model this in the following simple way.
Suppose there is some threshold level of utility
\begin_inset Formula $\gamma$
\end_inset
below which consumers simply aren't interested in going to the musician's
concerts.
If
\begin_inset Formula $\ln\left(y\right)<\gamma$
\end_inset
, the consumer just listen to and enjoys the music, but never goes to concerts.
\end_layout
\begin_layout Standard
Once this threshold is met (i.e
\begin_inset Formula $\ln\left(y\right)>\gamma$
\end_inset
, the consumer suddenly starts to enjoy the concerts.
In fact, lets assume that the consumer needs to go to concerts in order
to enjoy the additional music.
What I mean by that is that a consumer gets payoff
\begin_inset Formula
\[
\min\left[\ln\left(y\right),\gamma\right]
\]
\end_inset
if she doesn't go to concerts.
Her payoff from going to concerts is
\begin_inset Formula $\max\left[0,\ln\left(y\right)-\gamma\right]$
\end_inset
.
This gives her a total payoff of
\begin_inset Formula $\ln\left(y\right)$
\end_inset
.
\end_layout
\begin_layout Standard
The difference between concerts and records is that the musician can charge
for them.
If the musician makes
\begin_inset Formula $y$
\end_inset
recordings, then she can charge up to
\begin_inset Formula $\ln\left(y\right)-\gamma$
\end_inset
to each consumer to attend her concerts.
The more recordings the musician makes, the more the consumer is willing
to pay to go to her concerts.
The revenues from these concerts will be given by
\begin_inset Formula $t^{1}\left(y\right)$
\end_inset
and
\begin_inset Formula $t^{2}\left(y\right)$
\end_inset
for consumer 1 and consumer 2 respectively.
Of course,
\begin_inset Formula $t^{1}\left(y\right)$
\end_inset
and
\begin_inset Formula $t^{2}\left(y\right)$
\end_inset
are both 0 if the musician produces fewer that
\begin_inset Formula $y^{\gamma}$
\end_inset
where
\begin_inset Formula $y^{\gamma}$
\end_inset
is the number of recordings such that
\begin_inset Formula $\ln\left(y^{\gamma}\right)=\gamma$
\end_inset
.
\end_layout
\begin_layout Standard
When the musician tries to decide how much music to produce, she chooses
\begin_inset Formula $y$
\end_inset
to maximize
\begin_inset Formula
\begin{equation}
\omega^{m}-\frac{y}{3}+\ln\left(y\right)+t^{1}\left(y\right)+t^{2}\left(y\right).\label{musician_profits}
\end{equation}
\end_inset
The logic is that if she decides to produce
\begin_inset Formula $y$
\end_inset
recordings, it will cost her
\begin_inset Formula $\frac{y}{3}$
\end_inset
from her endowment
\begin_inset Formula $\omega^{m}$
\end_inset
, but she will be compensated by the consumers who will attend her concerts,
\begin_inset Formula $t^{1}\left(y\right)$
\end_inset
from person 1 and
\begin_inset Formula $t^{2}\left(y\right)$
\end_inset
from person 2.
Further, she enjoys the music herself, so this adds another
\begin_inset Formula $\ln\left(y\right)$
\end_inset
.
\end_layout
\begin_layout Standard
How well or poorly this 'market' performs depends on what
\begin_inset Formula $t^{1}$
\end_inset
and
\begin_inset Formula $t^{2}$
\end_inset
are.
We'll consider a simple version here that illustrates all the principles
involved.
We are going to assume that musicians price their concerts to extract all
the surplus the consumers get from the concert.
In other words, if a musician produces
\begin_inset Formula $y>y^{\gamma}$
\end_inset
recordings, then her concert tickets will cost the consumer exactly
\begin_inset Formula $\ln\left(y\right)-\gamma$
\end_inset
.
The consumer enjoys concerts a lot in this story, but the money he pays
to attend the concert is just equal to the benefit he gets, so we don't
need to think about concerts when we evaluate his payoff.
\end_layout
\begin_layout Standard
The musician's payoff is then relatively simple.
It is given by
\begin_inset Formula
\begin{equation}
\pi^{m}=\begin{cases}
\ln\left(y\right)+2\left(\ln\left(y\right)-\gamma\right)-\frac{y}{3} & \mbox{if \ensuremath{y>y^{\gamma}}}\\
\ln\left(y\right)-\frac{y}{3} & \mbox{otherwise.}
\end{cases}\label{musician_payoff}
\end{equation}
\end_inset
\end_layout
\begin_layout Standard
Notice that the revenue the musician earns at her concerts depends on how
many recordings she produces.
Whether or not this provides here with enough incentives to produce recordings
is what we are interested in.
\end_layout
\begin_layout Standard
Notice that with the log utility function we are using, musicians will always
produce music, since their payoff when there is no music at all is
\begin_inset Formula $-\infty$
\end_inset
.
The number of recordings the musician produces is determined by maximizing
(
\begin_inset CommandInset ref
LatexCommand ref
reference "musician_payoff"
\end_inset
) above.
The solution to the problem depends on the threshold utility level
\begin_inset Formula $\gamma$
\end_inset
.
If she produces enough recordings to get people interested in her concerts,
then the number of recordings she should produce is found by setting the
derivative in the first line of
\begin_inset Formula $\pi^{m}$
\end_inset
to zero.
This occurs where
\begin_inset Formula
\[
-\frac{1}{3}+\frac{3}{y_{m}}=0,
\]
\end_inset
or
\begin_inset Formula $y^{m}=9$
\end_inset
.
Notice that if she actually produces this much music, the sum of the marginal
benefits to all three consumers of music is
\begin_inset Formula $\frac{3}{9}$
\end_inset
which is exactly equal to the marginal cost of producing the music,
\begin_inset Formula $\frac{1}{3}$
\end_inset
.
So this outcome satisfies the Samuelson efficiency condition from production
of the public good that we studied in the last chapter.
In other words, this outcome is pareto optimal.
\end_layout
\begin_layout Standard
The musician at this outcome earns revenue from two consumers and gets her
own utility from producing recordings.
The consumers get the benefit of all the recordings the musician makes
whether they go to concerts or not.
However, when the musician becomes well known they receive an additional
benefit from going to her concerts.
\end_layout
\begin_layout Standard
For this to be the solution to the problem, we have to check two things.
First, it has to be the case that the critical utility level above which
consumers start going to concerts is no larger than
\begin_inset Formula $\ln\left(9\right)\approx2.2$
\end_inset
.
Otherwise, the musician would have to produce more than
\begin_inset Formula $9$
\end_inset
recordings to get consumers to go to his concerts and she doesn't want
to do this even when she is paid everything her concerts are worth.
\end_layout
\begin_layout Standard
Secondly, the musician has to prefer producing
\begin_inset Formula $9$
\end_inset
recordings (given the concert revenues she expects) to doing the youtube
thing and producing for her own entertainment.
If she does that, her payoff is
\begin_inset Formula $\ln\left(y\right)-\frac{y}{3}$
\end_inset
, which is maximized when she produces
\begin_inset Formula $3$
\end_inset
recordings.
That means that we need,
\begin_inset Formula
\[
\ln\left(9\right)-3+2\left(\ln\left(9\right)-\gamma\right)>\ln\left(3\right)-\frac{1}{3}.
\]
\end_inset
This will be positive if
\begin_inset Formula $\gamma<\frac{1}{2}\left(\ln\left(3\right)+2\ln\left(9\right)\right)$
\end_inset
, or if
\begin_inset Formula $\gamma$
\end_inset
is less than
\begin_inset Formula $5.5$
\end_inset
approximately.
\end_layout
\begin_layout Standard
Since
\begin_inset Formula $\ln\left(9\right)\approx2.2$
\end_inset
is the upper bound beyond which consumers won't go to concerts anyway,
we know something about what music will be produced.
If
\begin_inset Formula $\gamma$
\end_inset
is bigger than 2.2, then the musician won't bother with concerts and will
produce only 3 recordings.
If
\begin_inset Formula $\gamma$
\end_inset
is less than 2.2, she will produce
\begin_inset Formula $9$
\end_inset
recordings and both consumers will attend her concert.
\end_layout
\begin_layout Standard
It would be nice to have a term to describe each situation.
I'll call the case where
\begin_inset Formula $\gamma<2.2$
\end_inset
the 'pop' music case.
If
\begin_inset Formula $\gamma>2.2$
\end_inset
, I'll refer to that as the 'indie' music case.
Pop music is intended to sound like other pop music which people enjoy.
In this sense one pop musician can borrow the popularity of another and
attain the concert threshold more easily.
An indie musician has to build a following for her music from the ground
up, so maybe her threshold is higher.
Whether that argument is right or wrong, I'll use those terms to describe
the two situations.
\end_layout
\begin_layout Standard
Notice that will our assumption about concert pricing, the consumer seems
to be indifferent about whether or not he attends concerts.
He likes them well enough, but he has to pay a lot for them.
If he quits going to concerts, he still enjoys the band's music as before.
However, if he no longer attends concerts, the musician's revenue from
concerts falls, and she no longer produces as many records.
It is pretty easy to check that if you change the
\begin_inset Formula $2$
\end_inset
to a
\begin_inset Formula $1$
\end_inset
in (
\begin_inset CommandInset ref
LatexCommand ref
reference "musician_payoff"
\end_inset
) to reflect the fact that one of the consumers stops attending concerts,
then the musician will reduce the number of recordings she makes to
\begin_inset Formula $6.$
\end_inset
That will make the consumer worse off.
Maybe that is why each of us feels that we are the 'biggest fan' of someone.
Maybe they really wouldn't be the same without us.
\end_layout
\begin_layout Standard
So it doesn't make sense for a consumer to stop going to concerts if they
think this will influence the bands behavior.
It could also work the other way around.
If you would like to hear more from a band, and you would be willing to
pay for it, you can convince them to do it for a reasonable amount of money
because you know that the records they produce will generate concert revenues
from others.
Many wealthy individuals do exactly this.
For example, the classic rock band Journey, was paid half a million dollars
by the Republican party to perform at the Republican National convention
in 2012.
\end_layout
\begin_layout Standard
Suppose consumer 1 tries this, and offers the musician a contract that promises
to pay the musician a fee
\begin_inset Formula $p$
\end_inset
if she would just produce one more record.
He could bolster his argument here by claiming that this will make consumer
2 pay more as well, since he will attend more concerts.
Additionally, the musician is a musician, so she gets her own utility from
producing music.
The fee
\begin_inset Formula $p$
\end_inset
might not have to be so high for this reason.
\end_layout
\begin_layout Standard
With the fee schedules
\begin_inset Formula $t^{1}$
\end_inset
and
\begin_inset Formula $t^{2}$
\end_inset
we are using, the musician produces
\begin_inset Formula $9$
\end_inset
units of music.
The value to the musician of another piece of music is
\begin_inset Formula $\frac{1}{9}$
\end_inset
, the fee schedule for consumer 2 contributes
\begin_inset Formula $\frac{1}{9}$
\end_inset
, and the extra music costs
\begin_inset Formula $\frac{1}{3}$
\end_inset
to produce.
So consumer 1 would have to offer at least
\begin_inset Formula $\frac{1}{9}$
\end_inset
to convince the musician to produce more, and we know she isn't willing
to do this.
\end_layout
\begin_layout Subsection
Is the outcome fair?
\end_layout
\begin_layout Standard
There is something that you might not like about this equilibrium.
It isn't that musicians don't have enough incentives, they do.
It is possible, however, that musicians end up paying a large proportion
of production costs.
For example, in our efficient equilibrium, the musician pays
\begin_inset Formula $\frac{9}{3}=3$
\end_inset
out of her own pocket to make music.
She gets some of this back in the form of concert revenues.
Yet if
\begin_inset Formula $\gamma$
\end_inset
is close to
\begin_inset Formula $\ln\left(9\right)$
\end_inset
, these concert revenues won't be very large.
For example if
\begin_inset Formula $\gamma$
\end_inset
is
\begin_inset Formula $2$
\end_inset
, she will only get
\begin_inset Formula $.2$
\end_inset
from each of the consumers in concert revenues.
(Of course, if there were more consumers she would get more revenue - another
reason it might be better to be a pop musician than an indie musician).
\end_layout
\begin_layout Standard
This resembles a bit the situation with open source software.
It is true with software that the more useful programs you write the more
revenue you will earn from people who will pay you to install and service
your software.
For the most part, however, open source software emerges from the needs
of the people who write the software to solve their own internal problems.
\end_layout
\begin_layout Standard
Software developers probably do okay on their own, but musicians (apart
from megastars like Justin Bieber and aging classic rock icons like U2)
just aren't very wealthy, especially when they are starting out.
Since we like artists of all kinds, we might just want them to have more
income.
Then a perfectly legitimate role of copyright would be to redistribute
income from non-musicians to musicians.
\end_layout
\begin_layout Standard
Traditionally, Canada has had a relatively balanced approach to copyright
protection.
Until recently downloading music from the Internet was perfectly legal
as long as the download was for personal use.
The supreme court hadn't definitively ruled against making music available
for others.
However, policy did exist to redistribute income to artists.
There has been a longstanding tax imposed on media that are used to record
digital versions of music, tapes, CD's hard disks etc.
These taxes are remitted to the Canadian Private Copying Collective (http://cpc
c.ca), which is supposed to distribute the money.
The proceeds of the tax were around $28 million in 2002/3.
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Total CD sales in Canada by comparison, were about $600 million (http://www.cria.c
a).
\end_layout
\end_inset
This money is passed on to organizations representing artists.
\begin_inset space \space{}
\end_inset
For example, 18.9% of these revenues were to be distributed to performers,
15.1% to record companies, and the rest to authors and publishers.
The ACTRA Performers' Rights Society received about $7 million of this
money to distribute to their members.
For a variety of reasons, less than 1% of this money was actually paid
out to performers and artists (the figures are given at http://www.actra.ca),
nonetheless, the money is there in principle.
At least, ACTRA tells you what they do with the money.
I haven't had any luck figuring out what the record companies do with the
money they receive from CPCC -- they no doubt pay it to their lawyers.
\end_layout
\begin_layout Standard
Second, Canada directly subsidizes music through programs like the Sound
Recording Development Program (see http://www.canadianheritage.gc.ca for a
description) and through CRTC Canadian Content Restrictions which force
Canadian broadcasters to use a minimum proportion of 'Canadian Content'.
\end_layout
\begin_layout Standard
There is one reason to be wary of this kind of argument.
The basic problem the musician faces in producing music is that there is
a relatively high fixed cost associated with producing music.
You have to spend a lot of time doing it until people notice you and start
paying.
This is basically true for every business that was ever created.
Once you decide you should subsidize because of that, you might expect
every other business (who can afford lawyers) to get in line and start
lobbying for the same kind of subsidy.
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\begin_layout Section
Copyright
\end_layout
\begin_layout Standard
In the summer of 2012, Canada passed a copyright law that was more in line
with the American approach to copyright.
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\begin_layout Plain Layout
A great source of information on current Canadian copyright legislation
is http://www.michaelgeist.com.
\end_layout
\end_inset
Needless to say, downloading music from the internet is now 'stealing'
in Canada as it is anywhere else that trades with the US.
So we might as well use our simple model above to try to understand what
copyright does.
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Notice that in the 'pop' music model we described above, everyone does pretty
much what they want and everything works out fine without any copyright
protection.
Consumers pay the musician by going to concerts that they are perfectly
free not to attend.
Musicians are free to produce as much or as little music as they want.
Everything works out as we would like, except that musicians would like
to have more income, while consumers wish that the price of concerts were
lower.
\end_layout
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This doesn't mean that there isn't money to be made from all this.
There is a great story that conveys the main idea.
In 2008 a company called Larrikin Music sued a band from Australia called
Men at Work.
They had recorded a song called
\begin_inset Quotes eld
\end_inset
Down Under
\begin_inset Quotes erd
\end_inset
in the early 1980's that contained a couple of bars of a well know Australian
Folk song called
\begin_inset Quotes eld
\end_inset
Kookaburra
\begin_inset Quotes erd
\end_inset
.
If you asked anyone growing up in North America at that time what they
knew about Australia they would say,
\begin_inset Quotes eld
\end_inset
they have Kookaburra's
\begin_inset Quotes erd
\end_inset
, then they would hum the line from the folk song.
The song was played as an iconic symbol of Australia at the closing ceremonies
of the 2000 summer Olympic games in Sydney.
\end_layout
\begin_layout Standard
The song
\begin_inset Quotes eld
\end_inset
Kookaburra
\begin_inset Quotes erd
\end_inset
was written in 1934 by Marion Sinclair, who was alive when Men at Work
used the bar from her song in their song.
\begin_inset Quotes eld
\end_inset
Down Under
\begin_inset Quotes erd
\end_inset
was such a big hit that Ms.
Sinclair probably knew about it.
She probably got a big charge out of
\begin_inset Quotes eld
\end_inset
Down Under
\begin_inset Quotes erd
\end_inset
, as did most Australians.
When she died in 1990, Larrikin Music acquired the rights to the song which,
due to the wisdom of the Australian government in emulating the US and
trying to extend copyright protection for the life of the author plus forever,
was still (and probably still is) under copyright protection.
Larrikin was awarded 5% of the Bands royalties on the song.
\end_layout
\begin_layout Standard
The story indicates what a great job copyright does at promoting music and
redistributing money to musicians.
In the 'pop' music case, copyright redistributes the surplus that consumers
enjoy to record companies.
Part of this surplus could be end up in musicians' pockets if they are
astute enough at bargaining.
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The ancient acts that do manage to negotiate a big chunk of the surplus
for themselves typically become big proponents of strong copyright.
For example, when Britain extended copyright protection on music recordings
in 2011 from 50 to 70 years, the best known proponent of the law was Sir
Cliff Richard, who made successful recordings in the 60s.
Two arguments seemed to win the day, the first is that aging pop performers
from the 60's had no other source of income (since they obviously don't
produce hits anymore).
Since their hits were recorded more than 50 years ago, their income would
fall.
The second was the amazing argument from the music companies that if copyright
expires on these recordings their revenues would fall - thats it - when
copyright ends it ends, which must be bad because if it wasn't we wouldn't
have had it in the first place I guess.
\end_layout
\end_inset
This might not be so bad since we tend to like our well known musicians.
The problem is that it comes with bad incentive effects.
\end_layout
\begin_layout Standard
In the model we have so far, musicians make music which consumers enjoy
for free.
A recording company that wants to make money from all this needs to have
some way to make people pay for things that are free.
In the old days, they had an easy way to do that since no one could hear
music without having some kind of plastic plate, like a cd, to play it
from.
Etching mp3 files onto plastic plates was easy and cheap, so the record
companies needed something to prevent competitors from making the same
cds and offering them at a lower price.
The 'something else' was copyright.
The argument was that a recording should be treated like a piece of property
owned by the musician.
The musician could sign a contract with a recording company giving that
recording company the exclusive contract to produce cds with music on them.
If any other company tried to sell cds with the same music, then the company
with the contract could sue and recoup any profits it lost.
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\begin_layout Standard
Of course, there is no need for cds now - music is just placed on digital
files which can be freely distributed thanks to bitorrent.
Since consumers no longer needed cds to hear music, they didn't need either
the recording company, or its competitors any longer.
The recording companies contract to be the exclusive distributor of plastic
plates for the musician was no longer valuable.
The record companies needed something to replace the cd, so they invented
digital piracy and enlisted the courts and governments to collect their
revenue for them.
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Some hilarious examples, in 2007 the RIAA sued a lady called Jammie Thomas-Rasse
rt for downloading 24 songs to her computer.
A jury found her guilty of copyright enfringement and ordered her to pay
$9250 per song in damages ($222K).
The first trial was thrown out, the retrial ordered her to pay $1.92 million
dollars, an appeal court reduced it to $54K, another appeal reinstated
the $222K original award in 2012, after 5 years of rich legal fees.
\end_layout
\end_inset
\end_layout
\begin_layout Standard
In order to understand who it is that a digital pirate 'robs', lets stick
with cds and go back to 'pop' music example above where the musician is
producing
\begin_inset Formula $9$
\end_inset
units of music and each of the consumers is spending
\begin_inset Formula $\ln\left(9\right)-\gamma$
\end_inset
going to concerts.
\end_layout
\begin_layout Standard
The record company puts the music onto cds so consumers can listen to it.
Apparently, it cost about 7 cents per cd to do this.
What the record company brings to this market isn't cheap plastic, it is
copyright.
So lets just ignore the cost of the cd.
\end_layout
\begin_layout Standard
In this 'back in the day' world, a consumer has to buy a cd in order to
listen to music.
We will assume the record company attains the copyright and charges
\begin_inset Formula $p$
\end_inset
for each record the musician produces.
The musician could give the cds away, since they don't really cost anything
to produce.
If instead, the musician agrees to give copyright to the record company,
the first thing that happens is that the consumers have to start paying
for the recordings they used to listen to for free.
One of the implications of this is that the decision about how many records
to produce is taken away from the musician and given to the consumer who
now chooses
\begin_inset Formula $y$
\end_inset
to maximize
\begin_inset Formula
\[
\ln\left(y\right)-py.
\]
\end_inset
This is maximized when the consumer chooses to buy
\begin_inset Formula $y=\frac{1}{p}$
\end_inset
recordings.
One of the interesting implications of this is that the revenue that the
record company earns from each consumer is
\begin_inset Formula $1$
\end_inset
not matter what price it charges for records.
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status open
\begin_layout Plain Layout
More generally, marginal revenue will be declining in price and there will
be only one price that maximizes the record companies revenues.
We don't need to worry about that complication here.
\end_layout
\end_inset
\end_layout
\begin_layout Standard
So the record company could support the same number of recordings as before
by charging
\begin_inset Formula $\frac{1}{9}$
\end_inset
for each record.
The only complication in all this is that the amount the musician can charge
for her concerts falls from
\begin_inset Formula $\ln\left(9\right)-\gamma$
\end_inset
to
\begin_inset Formula $\ln\left(9\right)-\gamma-1$
\end_inset
because the consumer has to buy
\begin_inset Formula $9$
\end_inset
cds before she can benefit by going to the concert, so has less money to
pay for tickets.
\end_layout
\begin_layout Standard
There are a number of different possibilities here depending on the value
of
\begin_inset Formula $\gamma$
\end_inset
.
To make the argument as starkly as possible, lets assume that
\begin_inset Formula $\ln\left(9\right)-\gamma$
\end_inset
is exactly equal to 1.
So concert revenues for the musician disappear.
If the musician has any foresight, she won't want to sell her copyright
to the recording company without some compensation.
\end_layout
\begin_layout Standard
In fact, her lost concert revenues are exactly 2 in this example, so the
record company would have to pay the musician all their profits in order
to convince her to give up her copyright.
At first glance it doesn't seem to matter whether or not there is copyright
here.
\end_layout
\begin_layout Standard
However, we can redo the calculation a bit.
The musician is producing
\begin_inset Formula $9$
\end_inset
recordings.
She has no concert revenues anymore, but she receives a payment 2 from
the record company.
This puts her in exactly the same position she would be in if she gave
away her music and received all her revenue from concerts.
Writing it down, her profit is
\begin_inset Formula
\[
\ln\left(9\right)-\frac{9}{3}+2.
\]
\end_inset
Suppose now the recording company proposes instead that she produce
\begin_inset Formula $3$
\end_inset
records instead of
\begin_inset Formula $9$
\end_inset
.
The recording company will raise the price of records from
\begin_inset Formula $\frac{1}{9}$
\end_inset
to
\begin_inset Formula $\frac{1}{3}$
\end_inset
and their revenues will remain constant at
\begin_inset Formula $1$
\end_inset
per consumer.
However, since
\begin_inset Formula $\ln\left(3\right)-\frac{3}{3}>\ln\left(9\right)-\frac{9}{3}$
\end_inset
, the total payment the record company needs to make to the musician to
make it worth her while under this new arrangement is strictly less than
2.
Suddenly the record company has manufactured a profit for itself, left
the musician in the same position she would have been in had she refused
the offer and continued to earn money from concerts.
\end_layout
\begin_layout Standard
This new arrangement has transferred surplus from consumers to musicians
and record companies, but now there is a big cost - the amount of music
being produced has fallen, and concert revenues are down considerably.
\end_layout
\begin_layout Standard
You might think that a musician could astututely bargain and get some of
this surplus for themselves.
Here is a picture that appeared in the online magazine The Root.
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status open
\begin_layout Plain Layout
\begin_inset Flex URL
status open
\begin_layout Plain Layout
http://www.theroot.com/articles/culture/2010/07/the_root_investigates_who_really_g
ets_paid_in_the_music_industry.html
\end_layout
\end_inset
\end_layout
\end_inset
\end_layout
\begin_layout Standard
\align center
\begin_inset Graphics
filename share_of_revenues.eps
scale 50
\end_inset
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\begin_layout Standard
It does appear that a lot of people make money in the music industry, but
not the musicians.
It is ironic that the large reward the music industry earns comes from
their diligent efforts to make it harder for people to hear music.
\end_layout
\begin_layout Standard
This is just a simple model with special assumptions.
If you want to hear a more detailed discussion of how napster affected
concert revenues more broadly (filesharing not surprisingly raises concert
revenues) you can look at
\begin_inset Quotes eld
\end_inset
Supply Responses to Digital Distribution: Recorded Music and Live Performances
\begin_inset Quotes erd
\end_inset
by J.H.
Mortimer, C Nosko, and A.
Sorenson (2012).
\begin_inset Foot
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\begin_layout Plain Layout
Oddly enough, despite the clams of record companies, not all economists
agree with the assertion that cd sales have fallen.
For example
\begin_inset Quotes eld
\end_inset
The Effect of File Sharing on Record Sales, by Olberholzer and Strumpf (2004).
Of course, record companies pay lawyers a lot of money to lobby for copyright
protection.
I guess from revealed preference they must be losing money.
\end_layout
\end_inset
\end_layout
\begin_layout Standard
One might think that in the indie music case where live shows generate little
revenue and there are fewer recordings, that copyright protection might
promote incentives.
In the special log utility model here that isn't the case.
Copyright protection has no impact whatsoever on the level of output.
It is a similar argument to the one above, so we won't go through it here.
However, the record companies do earn profit by expropriating the consumers'
surplus.
As above, some of this surplus might go to musicians.
If it does, copyright does at least redistribute income toward people we
like.
\end_layout
\begin_layout Standard
The jist of the example discussed here is fairly straightforward.
Copyright redistributes income from consumers to record companies and possibly
musicians.
The downside is that it does this at a potentially great cost by reducing
the number of recordings that are produced.
The argument is often made that copyright protection improves incentives.
The reason it can't really accomplish that is because it tries to accomplish
this by granting a monopoly which makes profits by reducing output exactly
as we described above.
Perhaps the music industry really isn't big enough for it to matter one
way or the other to most of us.
However, when the same blanket 'protection' is extended to software, books,
movies and even to images that you see every day of your life (Apple managed
to sue Samsung successfully in the US by claiming that Samsung had violated
Apple's patent on 'rounded edges'.
Japan threw this silly case out), then it starts to become a bit worrisome.
\end_layout
\begin_layout Standard
If the arguments you have heard in this note were protected by copyright,
they never would have been written down.
You would be studying Alfred Marshall or Karl Marx simply because it would
be too costly for your professors to acquire the right to write something
else down without paying a royalty to a holding company who acquired the
rights to their works 50 years ago.
\end_layout
\begin_layout Standard
If you want to learn more about copyrights and patents from an economics
perspective, a very entertaining (and free) book is
\begin_inset Quotes eld
\end_inset
Against Intellectual Monopoly
\begin_inset Quotes erd
\end_inset
by DK Levine and M.
Bolderin (2007), which is available at http://levine.sscnet.ucla.edu/general/intel
lectual/against.html.
\end_layout
\end_body
\end_document