The recording industry has seen a massive decline in sales since 1999. This decline has by many, especially the recording industry itself, been attributed to the introduction of file-sharing services on the Internet. But despite lawsuits and campaigns advertising moral behavior, sales continue to decline. Moreover, individuals seem to treat music as a ‘public good’ more than a ‘private good’.
This thesis investigates the claim put forth by the recording industry that internet file-sharing is to blame for the decline in record sales. It provides an overview of relevant literature on the subject, and uses this to analyze if piracy can have other effects on the industry and the economy than just displacing sales. It finds that, under certain assumptions, piracy might act as a promotional tool, potentially increasing the sale of a subsequent album, or increasing demand for complimentary goods, like live performances. The thesis also looks at how the current copyright and copy protection schemes have been designed, and discusses whether there is room for changes that might improve social welfare. It concludes that targeted enforcement is a better option than current broad-based enforcement, if possible. It also concludes that of the three government options tax, subsidy, and fine, a subsidy is the socially preferred alternative. Enforcing a tax on copy complementaries, like CD-burners, recordable CDs or a multimedia tax, is a second-best option, whereas a fine only lowers the consumer surplus without positively benefiting the publisher.