Joel Waldfogel
Current Projects and Working Papers
September 2009
This fall Princeton publishes my fun book, Scroogenomics. This page describes my scholarly work.
Two years ago I finished a book, The Tyranny of the Market: Why You Can’t Always Get What You Want. More information on that here.
Most of my recent work falls into two broad areas, intellectual property
piracy and the effects of agglomeration on product availability. Lately I’ve been working on pricing of
digital products, and I continue to pursue a few other things. Abstracts of current and recent work appear
below with links to the papers that are available in draft form.
Papers
1. Music for a Song: An Empirical Look at Uniform Song Pricing and its Alternatives (with Ben Shiller)
Economists have well-developed theories that challenge the wisdom of the common practice of uniform pricing. With digital music as its context, this paper explores the profit and welfare implications of various alternatives, including song-specific pricing, various forms of bundling, two-part tariffs, nonlinear pricing, and third-degree price discrimination. Using survey-based data on nearly 1000 students’ valuations of 100 popular songs in early 2008 and early 2009. We find that various alternatives – including simple schemes such as pure bundling and two-part tariffs – can raise both producer and consumer surplus. Revenue could be raised by between a sixth and a third relative to profit-maximizing uniform pricing. While person-specific uniform pricing can raise revenue by over 50 percent, none of the non-discriminatory schemes raise revenue’s share of surplus above 40 percent of total surplus. Even with sophisticated pricing, much of the area under the demand curve for this product cannot be appropriated as revenue.
2. NEW: Music File Sharing and Sales Displacement in the iTunes Era
A growing empirical literature examines the relationship between music file sharing and legal purchases of music, but existing studies examine the period before consumers had attractive legal digital a la carte options. The iTunes Music Store has grown quickly since its appearance in 2003, and digital music now accounts for a third of US recorded music sales. Using a new survey of University of Pennsylvania undergraduates, we ask how music file sharing and sales displacement operate in the iTunes era, when the alternative to file sharing is purchasing individual songs, rather than entire albums. We find large amounts of file sharing in this population. Respondents have more stolen than paid music, but the music obtained via file sharing is, for the most part, low-valuation music which the respondents would likely not have purchased. The rate of sales displacement implied by the relationship between stolen and purchased music across respondents is between -0.15 and -0.3. That is, an additional song stolen reduces paid consumption by between a third and a sixth of song. Perhaps surprisingly, this is about the same as the CD sales displacement rate found for the pre-iTunes era using a similar empirical approach on a similar study population.
3. NEW: Movie Piracy and Sales Displacement in a Sample of Chinese College Students (with Jie Bai)
Intellectual property piracy is widely believed, by authorities in both U.S. industry and government, to be rampant in China. Because we lack evidence on the rate at which unpaid consumption displaces paid consumption, we know little about the size of the effect of pirate consumption on the volume of paid consumption. We provide direct evidence on both the volume of unpaid consumption and the rate of sales displacement for movies in China using two surveys administered in late 2008 and mid-2009. First, using a survey of Chinese college students’ movie consumption and an empirical approach parallel to a similar recent study of U.S. college students, we find that three quarters of movie consumption is unpaid and that each instance of unpaid consumption displaces 0.14 paid consumption instances. Second, a survey of online Chinese consumers reveals similar patterns of paid and unpaid movie consumption but a displacement rate of roughly zero. We speculate on the small displacement rate finding relative to most of the piracy literature.
4. NEW: The Challenge of
Revenue Sharing with Bundled Pricing: An Application to Digital Music (with
Ben Shiller)
Bundling can increase revenue and profits relative to selling products on a standalone basis, and this is an especially attractive strategy for zero-marginal-cost information products. Despite the clear benefits of bundling, it has one major problem: bundling produces revenue that is not readily attributable to particular pieces of intellectual property, creating a revenue division problem. The Shapley value provides a well-motivated solution to this problem, and we use unique survey data to create measures of bundle value and, in turn, to estimate Shapley values for each of 50 bundle elements. We then evaluate feasible revenue sharing schemes, including equal sharing, proportional sharing, and the modified Shapley value of Ginsburgh and Zang (2003, 2004). We first document that the Shapley value is highly incentive compatible (all bundle elements fare better inside the bundle than they do outside on a standalone basis). We then evaluate the feasible schemes according to both their incentive compatibility and their similarity with the Shapley value. We find, not surprisingly, that the feasible schemes are less incentive compatible than the Shapley value. Among the feasible schemes, equal sharing performs worst while the GZ scheme performs best and substantially better than proportional schemes in current practice.
5. Pop Internationalism: Globalization of the Music Industry, 1960-2006 (with Fernando Ferreira) DRAFT AVAILABLE LATER THIS FALL
Advances in communication technologies over the past half century have made the cultural goods of one country more readily available to consumers in another, raising concerns that cultural products from large economies – in particular the US - will displace the indigenous cultural products of smaller economies. The debate over trade in cultural products has been better informed by theory than evidence. The goal of this project is to document some facts about the global music industry since 1960, using data on popular music charts from 11 countries (Austria, Brazil, Canada, France, Germany, Italy, Norway, Sweden, Switzerland, UK, US). Who buys whose music? How has it changed over time? And how do music trade patterns compare with trade patterns for movies? We find that while Hollywood fare dominates world trade in movies, music is quite different. While domestic musical repertoire is disproportionately popular everywhere, repertoire shares among imports are closer proportional to exporting countries’ GDP shares. Overall, different countries’ musical repertoires have world shares roughly equal to their GDP shares. Surprisingly, as the world has become better linked over the past half century, the US has grown less dominant in music relative to GDP. Since 2000 the trade in music has been more balanced – in line with GDP shares – than at any time since 1960, and domestic artists have increasing market shares in almost all markets. These facts are surprising against the backdrop of technological change that makes trade easier.
Intellectual Property Piracy
Television
In the past few years, YouTube and other sites for sharing video files over the Internet have vaulted from obscurity to places of centrality in the media landscape. The files available at YouTube include a mix of user-generated video and clips from network television shows. Networks fear that availability of their clips on YouTube will depress television viewing. But unauthorized clips are also free advertising for television shows. As YouTube has grown quickly, major networks have responded by making their content available at their own sites. This paper examines the effects of authorized and unauthorized web distribution on television viewing between 2005 and 2007 using a survey of Penn students on their tendencies to watch television series on television as well as on the web. The results provide a glimpse of the way young, Internet-connected people use YouTube and related sites. While I find some evidence of substitution of web viewing for conventional television viewing, time spent viewing programming on the web – 4 hours per week – far exceeds the reduction in weekly traditional television viewing of about 25 minutes. Overall time spent on network-controlled viewing (television plus network websites) increased by 1.5 hours per week. See the paper.
Movies
New information technology has reduced marginal production and distribution
costs of information goods to negligible levels and promises to revolutionize
many industries. Unpaid copies of digital products can be as good as paid first-generation
copies, and their availability can undermine the ability of sellers to cover
first-copy costs. As a result, unpaid distribution has emerged as a major issue
facing the music and movie industries in the past few years. Using survey data
on movie consumption by about 500
Music
Recording industry revenue has fallen sharply in the last three years, and some - but not all - observers attribute this to file sharing. We collect new data on albums obtained via purchase and downloading, as well as the consumers' valuations of these albums, among a sample of US college students in 2003. We provide new estimates of sales displacement induced by downloading using both OLS and an instrumental variables approach using access to broadband as a source of exogenous variation in downloading. Each album download reduces purchases by about 0.2 in our sample, although possibly much more. Our valuation data allow us to measure the effects of downloading on welfare as well as expenditure in a subsample of Penn undergraduates, and we find that downloading reduces their per capita expenditure (on hit albums released 1999-2003) from $126 to $100 but raises per capita consumer welfare by $70. The paper, joint with Rafael Rob, appeared in a file-sharing symposium in the Journal of Law & Economics in 2006.
Agglomeration and Product Availability
" The Median Voter and the Median Consumer"
When a product's product provision entails fixed costs, it will be made available only if a sufficient number of people want it. Some products are produced and consumed locally, so that provision requires not only a large group favoring the product but a large number nearby. Just as one has an incentive to sort into community whose median voter shares his preferences for local public goods, product markets may provide an analogous incentive to sort into a community whose consumers tend to share his preferences in private goods. Using zip code level data on chain restaurants and restaurants overall, this paper documents how the mix of locally available restaurants responds to the local mix of consumers, with three findings. First, based on survey data on chain restaurant patronage, restaurant preferences differ substantially by race and education. Second, there is a strong relationship between restaurants and population at the zip code level, suggesting that restaurants’ geographic markets are small. Finally, the mix of locally available chain restaurants is sensitive to the zip code demographic mix by race and by education. Hence, differentiated product markets provide a benefit -- proximity to preferred restaurants -- to persons in geographic markets whose customers tend to share their preferences. This paper appeared in the Journal of Urban Economics last year.
“Who Benefits Whom in the Neighborhood? Demographics and
Retail Product Geography” (prepared for an NBER Volume on the
Economics of Agglomeration)
Because
of fixed costs, additional people nearby confer a benefit on each other by
helping to make more retail products available. Yet, because product
preferences differ across groups of consumers, the appeal of what’s available
depends on the mix of consumers. If product preferences relate to consumer
characteristics such as race, income, age, and ethnicity, then product
availability will be stimulated by concentration of like individuals. The
sensitivity of product availability to demographic mix of consumers has been
documented for metropolitan-area products, such as newspapers, radio, and
television, as well as one neighborhood-level product, restaurants. Here I
revisit the question for a broader group of local retail establishments. Using
the Consumer Expenditure Survey, I document that preferences differ across
groups. Then, using the 2000 Census and the 2000 Zip code Business Patterns, I
show that the mix of products available is sensitive to the mix of local
preferences. People therefore derive benefit through the product market from
agglomerating with persons with similar product preferences, and this may help
to explain patterns of residential segregation.