This is in fact my Economics essay for the Barnett Prize. The person who marked it thought it was a terrible essay (fair enough), but I still think it’s interesting to discuss. So here it is, however horrific an essay, after being cut down to exactly 1500 words, and with a less bellicose attitude towards the RIAA than normal (for the sake of being PC). It’s entitled “Steal this Essay”. This is also an experiment to see how well WordPress’ ‘import from Word’ feature works. I have to say, I’m impressed by how it deals with footnotes and citations/bibliographies.
Using a specific microeconomic case study from either the UK or abroad, assess how governments can deal with market failure.
Copyright infringement is a growing concern in the music and film industry. Despite the best efforts of governments, private firms, law-enforcement agencies and cyber-police, the amount of music and film in illegal circulation over the internet has grown at an exponential rate since the conception of Napster, the first peer-to-peer (P2P) file sharing service to hit the internet. According to Ars Technica (1), usage of Bittorrent, a popular tool used by file sharers, grew 24% in five months, and Bittorrent is apparently responsible for 80% of the world’s traffic. Global music sales dropped from $38bn in 1999 to $32bn in 2003 and American studios reported $2.3bn in losses to film piracy in 2005 alone (2). Free market forces are failing: talent starved of adequate funding will fail to flourish and music, entertainment and culture may be eroded as a result. Without consumers willing to pay for goods produced by talented artists, such artists will be unable to invest profits in creating more music (they may opt to record fewer CDs), and supply of the product decreases, increasing its cost which in this case further exacerbates losses leading to a vicious cycle. With revenue from their music falling, artists may choose to switch careers, discontinuing their contributions to music: the labour supply decreases, as does the pool of musical talent. Culturally, the negative externalities of this are highly significant, resulting in a shallower music culture.
In my opinion, the primary reason for file sharing is simply convenience. The internet allows even very large amounts of data to be transferred at zero cost and supersonic speeds; the temptation to cheat the system becomes irresistible: the opportunity cost of buying a CD from a local store, which involves both monetary as well as time sacrifices, is far greater than the single mouse click it takes to download the entire album. Pirated media can be seen as a substitute good for which consumers pay with risk of getting caught rather than with conventional currency; industry is losing out to this illegal competition.
Existent government measures have proven ineffectual at best. For a while law enforcement worked: the RIAA and MPAA succeeded in intimidating file sharers into accepting monetary settlements out of court, thereby recouping losses and deterring potential copyright criminals. However when exonerated file sharers began to sue the RIAA back (3), subsequent copyright lawsuits became somewhat anathematised and digital rights organisations procured an increasingly unpopular and disrespected reputation for aggressive methods (as illustrated). One of the primary difficulties is the issue of evidence: piracy is exceedingly difficult to detect with ever-advancing encryption technology. Taking the current trial of The Pirate Bay as an example of ineffectuality, on the second day of the trial half the charges have already been dropped (4) (at the time of writing this). To make things worse, the music industry’s attempts to cover itself from piracy only punish the law-abiding: employment of digital rights management on music by online retailers such as Apple renders the files unusable with anything but iTunes and iPods, causing frustration, heavily discouraging the buying of music.
The government has attempted to enforce the law through Internet Service Providers (ISPs): since they provide the means to perform illegal activities, perhaps it should be their responsibility to police their networks. In 2008, the UK’s largest six ISPs agreed (5) to a code laid out by the government: if an ISP has reasonable evidence upon which to suspect a customer of illegally downloading music, it will throttle his download speeds significantly. This appears promising: a large proportion of the country is now under surveillance by ISPs and users have an incentive to stop file sharing; Virgin Media even sent out warning letters to several hundred of its file sharing customers. However the government is pitting itself directly against the free market forces: as pointed out by the Wired article (5), it is far more probable that they were merely taking measures against losing customers: firms appreciate the revenue from them. In addition, ISPs abiding by this code are likely to lose business owing to a pervasive sense of intrusion from being constantly monitored. Besides, imposing regulations on businesses raises supply costs (employing a monitoring team for example), shifting the supply curve leftwards, resulting in a more expensive, and less abundant, good or service:
[Insert bog standard Economics AS/AD diagram]
One suggestion was for the government to accept the fact that internet users will share files, and rather than fight this unwinnable war, to tax broadband usage and return tax revenue to industry, thus compensating for the market failure. Unsurprisingly this has been met with much fury: not only does this demonstrate great cynicism and mistrust on the government’s part, but it may actually exacerbate the problem: consumers might decide that since they have paid for their illegal downloads they are entitled to download copyrighted material.
Alternatively, similarly to using disturbing television advertisements about lacking TV licences, the government could attempt to threaten the population into submission. There is good evidence that advertising works with anti-smoking campaigns, so there appears to be a high probability of success with this measure. Again the government is no longer working against the free market: it is rather injecting information into the market and allowing consumers to make a better-informed decision. Unlike regulation, such measures preserve human rights and can be highly effective in combination with other measures. Unfortunately, unlike the case of smoking and even TV licences, a savvy file sharer knows he can hide his activities indefinitely: threatening advertisements do not work for such people (who also tend to be the heaviest sharers). Education may eventually curb the problem through generations of law-abiding citizens, but such slow-acting measures may not be sufficiently effective in the short run to avert cultural erosion.
In September 2007, it was discovered that a large (needless to say illegal) cyber-offensive was being planned (6) against The Pirate Bay by MediaDefender in an attempt to halt file sharing activity. Although it was discovered and averted, perhaps such measures are the only ones that will work: aggressive attacks on the central hive of activity; this is after all what governments are accustomed to doing when dealing with terrorists and criminals. However, despite a worldwide offensive on terrorism, ever since September 2001, little, if not negative, progress has been made against it; what guarantees the success of an offensive against a worldwide network of highly intelligent anonymous criminals?
Perhaps to understand fully the nature of this market failure, one should reconsider the extent and type of damage done by file sharing, and also take into account its positive aspects. According to US District Judge James P. Jones (7), ‘17,000 illegal downloads don’t equal 17,000 lost sales’. If a customer wants some music but is not prepared to pay the price quoted on Amazon (indicating he is not willing and able to pay for it), he would not be in the market in the first place, so the music industry should be indifferent to whether he downloads that music illegally in the end. Of course this line of reasoning cannot be extended too far, but the point is that not every illegal download harms industry. In fact there was a study (8) (English synopsis (9)) commissioned by the Dutch government which concluded that in fact file sharing contributes €100m per year to the Dutch economy. Apparently much downloaded content becomes treated as sample content to be bought later, and downloaders tend to buy more games than non-downloaders (possibly an effect of exposure to online marketing). In addition, the positive externalities of file sharing include broader cultural wealth. By annihilating file sharing, the government would lose out on positive externalities as well as negative ones. The report concludes that most losses can be attributed to things other than piracy, including competition with other forms of entertainment. Notably in The Netherlands, downloading media for personal use is legal. Perhaps an unconventional solution to the market failure is to legalise file sharing, thus maximising the social benefits and accepting the (minimal) social costs. Besides, surveys show that 80% of British people would be in favour of this measure (10).
In conclusion, business has taken a radical new direction since the concept of ‘free goods’ first appeared. Google provides millions with enormously powerful search facilities for free and receives its revenue largely from advertising. According to Wikinomics (11), ‘free and collaborative’ (complete with externalities) is the future, whether we like it or not. I believe governments should embrace this future and work with the market, rather than fight it. Whatever the solution to the problem of copyright infringement eventually turns out to be, I suspect, and hope, that the RIAA and MPAA will not be closely involved, that free market tools will be capitalised upon, and that the positive externalities of change will be fully appreciated.
1. Bangeman, Eric. BitTorrent use soars as MPAA fights on against P2P sites. ars technica. [Online] 17 04 2008. http://arstechnica.com/old/content/2008/04/bittorrent-use-soars-as-mpaa-fights-on-against-p2p-sites.ars.
2. File sharing. Wikipedia. [Online] http://en.wikipedia.org/wiki/File_sharing.
3. Oregon RIAA Victim Fights Back. Recording Industry vs The People. [Online] http://recordingindustryvspeople.blogspot.com/2005/10/oregon-riaa-victim-fights-back-sues.html.
4. enigmax. 50% of Charges Against Pirate Bay Dropped. TorrentFreak. [Online] 17 02 2009. http://torrentfreak.com/50-of-charges-against-pirate-bay-dropped-090217/.
5. Buskirk, Eliot Van. British ISPs Agree To Curb File Sharers’ Internet Access. Wired. [Online] 23 07 2008. http://blog.wired.com/music/2008/07/uk-could-announ.html.
6. Leyden, John. Pirate Bay sues media giants for ‘sabotage’. The Register. [Online] 24 09 2007. http://www.theregister.co.uk/2007/09/24/pirate_bay_counterstrike/.
7. Cheng, Jacqui. Judge: 17,000 illegal downloads don’t equal 17,000 lost sales. ars technica. [Online] 19 01 2009. http://arstechnica.com/tech-policy/news/2009/01/judge-17000-illegal-downloads-dont-equal-17000-lost-sales.ars.
8. Ups and downs – Economische en culturele gevolgen van file sharing voor muziek, film en games. TNO. [Online] 2009. http://tno.nl/content.cfm?context=markten&content=publicatie&laag1=182&laag2=1&item_id=473.
9. Ernesto. Economy Profits From File-Sharing, Report Concludes. TorrentFreak. [Online] 19 01 2009. http://torrentfreak.com/economy-profits-from-file-sharing-report-concludes-090119/.
10. Orlowski, Andrew. 80% want legal P2P – survey. The Register. [Online] 16 06 2008. http://www.theregister.co.uk/2008/06/16/bmr_music_survey/.
11. Tapscott, Don and Williams, Anthony D. Wikinomics. London : Atlantic Books, 2007. ISBN 978-1-84354-637-5.
12. P2P Survey Results. In HIIT. [Online] 2007. http://inhiit.blogspot.com/2007/09/p2p-survey-results.html.
 Recording Industry Association of America
 Moving Pictures Association of America
 A large Bittorrent tracker and hub of illegal piracy
 Virgin Media, Sky, Carphone Warehouse, BT, Orange and Tiscali
 Internet Service Providers
 Anti-piracy company