The Effect of Music Piracy on CDs Purchases

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The Effect of Music Piracyon CDs Purchases

• Siwat Auampradit

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CHAPTER 1INTRODUCTION
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• Digital products can be compressed without losing
  much information or quality and the reproduction
  cost are negligible.
• Piracy substitutes the legitimate goods.
• Some kinds of information products (music and
  movies) have social interaction in which people
  would talk about with their friends (Peitz and
  Waelbroeck, 2003).
• Piracy may stimulate demand for legitimate
  products.
• The conclusion of the effect of piracy on
  legitimate demand is ambiguous.

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Objective of the Study

• To analyze how music piracy by means of
  purchasing and downloading illegal music has
  affected on legitimate CDs by employing
  simultaneous tobit estimation.

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Scope of the Study

• Interest in the effect of music piracy on demand
  side and focus only on Thai music.
• Music consumer is the people who listen to the
  music whether legally or not, and live in Bankok.
• Define Thai popular music as music that has a
  wide following, is produced by contemporary Thai
  artists and does not required public subsidy to
  survive.
• Thai traditional songs and Thai country songs
  (Louk Toung) are excluded from Thai popular
  music.

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• Define pirated music CDs as pirated music in MP3
  format contained in compact disc.
• Define pirated music downloading as pirated music
  downloaded from the internet.
• Music piracy is defined as the pirated music CD
  plus pirated music downloading.

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CHAPTER 2LITERATURE REVIEW
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• Piracy is endogenous, or at least that it is
  subject to unobserved heterogeneity, OLS
  estimator will be biased and inconsistent.
• Instrumental variables (Hui and Png, 2003
  Zentner, 2003 Rob and Waldfogel, 2004
  Oberholzer and Strumpf, 2004).
• Individual level data collected by survey
  (Zentner, 2003 Rob and Waldfogel, 2004).

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CHAPTER 3THEORETICAL MODEL
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Theoretical Framework

• Following Hui and Png (2003), consider the market
  for an information product by a single
  profit-maximizing producer.
• Potential end-users have three ways to choose
  buy the legitimate item, copy the item or not
  use.
• Assume a distribution of potential users
  who differ in their value, , for the item.
• Assume zero reproduction cost.

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• A net benefit is
• where is the price of legitimate item,
• captures the quality differential
  between the legitimate and pirated item.

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• Buy the original and .
• Copy the item and .
• represents the cost of copying which is
  the expected penalty if the user will be caught,
  or it could represent any other factor that has
  opposite effects on demands for legitimate and
  pirated item.

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Indifferent between Buying Originaland Copying

• (3.1)

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Indifferent between Copyingand Not Use

• (3.3)

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Defines Cut-off Values

• Buy the legitimate item
• Copy the item
• Not Use

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Demand

• Demand for original
• (3.2)
• Demand for copy
• (3.4)

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The Set of Comparative Static

• From (3.1),
• From (3.3),

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• From (3.2), (3.5)
• (3.6)
• (3.7)
• From (3.4), (3.8)
• (3.9)
• (3.10)

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• Thus,
• and (3.11)
• and (3.12)
• and (3.13)

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Extend the Model

• Positive Influences
• Piracy may raise the demand for original by
• Inform the item
• Network externalities
• is increasing function.

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• A net benefit is

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Cut-off Values

• (3.14)
• 
  (3.15)

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Demand with the Additive Term

• Demand for original
• Demand for copy

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• Thus,
• (3.16)
• Demand for the legitimate product increases with
  the increase in the extent of piracy.

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We can state that

1. Piracy substitutes the demand for the original
   (Substitution Effect).
2. Piracy stimulates the demand for the original
   (Network Effect).

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Establish Model

• Forming by demand equations and they are
  nonlinear.
• Taylor series approximation will be applied to
  linearize the equations by using the first order
  Taylor series approximation.

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• Then rearrange as follow.
• (3.26)

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• Accordingly, based on (3.11), (3.12), (3.13) and
  (3.16), the approximated equations (3.26) and
  (3.29) and adding the individual characteristics,
  the structural demand equations are constructed
  as
• (3.30)
• (3.31)

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• represents the vector of the observed
  individual characteristics (Exogenous).
• represents the quality difference between
  the original and the copy.
• and are random errors with zero means.
• The extent of piracy is considered as an
  endogenous variable since it depends on price,
  the expected penalty and the quality difference.

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• Since cannot be observed. Though it can be
  observed, it is difficult to transform the data
  into a common operational scale.
• From (3.31),
• Then replace into (3.30).

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• Obtain (3.32)

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• Consider
• It consists of two parts
• Demand for the original is increasing in the
  extent of piracy
• Substitution between original and pirated item

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CHAPTER 4METHODOLOGY
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Variable Meaning Expected Sign
Qc Number of pirated music accounted in albums /-
WTP Willingness to pay for a legal music CD
K Consumers perception about quality difference between legal and pirated music
SEX Dummy variable for gender 1 Male, 0 Female /-
AGE Consumers age /-
EDU Highest education consumer perceived -
INC Consumers income /-
HOU Hours on music listening per day
MUS Consumers level of interest in music
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Variable Meaning
MPP Dummy variable for using the devices that can play any formats of music files 1 Use, 0 Not use
BRO Dummy variable for accessing broadband internet 1 Use, 0 Not use
IT Consumers level of computer knowledge
IS Consumers level of internet knowledge
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• Recall equation (3.32)
• It is applied as
• (4.1)

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• First stage
• (4.2)
• Second stage
• (4.3)

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Deleted Variable Log Likelihood df AIC BIC
None -3608.77 26 7269.54 7380.34
WTP -3621.70 24 7291.40 7393.67
SEX -3616.20 24 7280.40 7382.68
AGE -3610.23 24 7268.47 7370.74
EDU -3609.83 24 7267.65 7369.93
INC -3609.31 24 7266.62 7368.89
HOU -3613.62 24 7275.24 7377.51
MUS -3643.79 24 7335.57 7437.85
K -3611.20 24 7270.40 7372.68
EDU, INC -3610.664 22 7265.33 7359.08
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CHAPTER 5RESULT
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• The estimated result
• significant at 99 level of confidence
• significant at 95 level of confidence
• significant at 90 level of confidence

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Marginal Effects
Variable Coefficient dy/dx
Qc -0.004 -0.001
WTP 0.008 0.003
SEX 1.722 0.656
AGE 0.063 0.023
HOU 0.193 0.071
MUS 0.491 0.181
K 0.070 0.026
MPP 0.000
BRO 0.000
IT 0.000
IS 0.000
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Reasons whether to purchase music CDs or not Frequency Percent
Purchase legal Thai music CDs (282 respondents)
- Albums from favorite artists 240 45.80
- Popular Music 76 14.50
- Acceptable price 45 8.59
- Collective 84 16.03
- Others 32 6.11
Not purchase legal Thai music CDs (242 respondents)
- No albums from favorite artists 116 22.14
- Price is too high 61 11.64
- Pay for other entertainment goods 93 17.75
- Others 54 10.31
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Reasons whether to consume pirated music or not Frequency Percent
Consume pirated music (330 respondents)
- Cheap 160 30.53
- Convenient 143 27.29
- Similar quality with the original 68 12.98
- Select songs matching with preference 196 37.40
- Others 48 9.16
Not consume pirated music (194 respondents)
- Illegal 46 8.78
- Lower quality than the original 70 13.36
- Probably reach incomplete files 90 17.18
- Want to support artists 53 10.11
- Others 86 16.41
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First Ranking Factor Determining Purchasing Decision Frequency Percent
Price 77 14.69
Albums from favorite artists 259 49.43
Quality and melodiousness 163 31.11
Package (e.g. booklet, artwork) 5 0.95
Laws 15 2.86
Others 5 0.95