Some Music and Some Econ 101

This weekend, I had a pleasant debate about the music industry and downloading of music for free. My overall point was that downloading music is and should be illegal and the government should work to increase enforcement. While I do think the record industry has been slow to evolve with new technology, I don't think stealing music is a good (moral or effective) way to force the industry to change.

Although I do like to recap arguments on my blog sometimes - with the intention of synthesizing my thoughts, not to get the last word - this is not the point of this post. As I was falling asleep last night thinking about the debate, I realized a way to better show a fear I have with the illegal downloading of music - through a supply and demand graph!

One of the points I made was that in the market place, consumers have the choice to show their dissatisfaction with a product by refusing to purchase it. I argued that it gives the consumer an unfair advantage in the marketplace if they can get the product without paying for it (fairness within a transaction is necessary for a well-functioning market system - I can explain further if anyone wants me to). This will drive the price down to an unsustainable level.


Here is where the economics comes in. For a given product, consumers are willing to pay a certain price to have that product as opposed to not having it. That price is shown by the original equilibrium, P1, Q1. When a consumer can choose to have the product without paying for it, or have the product and pay for it, their price is no longer the value of the product, but the value of feeling good about how they obtained the product. Clearly that price will be much less than the previous price.

What you see in this scenario is a shift in the demand curve from D1 to D2. And when the demand curve shifts back, you see a lower equilibrium price, but more importantly, a lower quantity. This means that in this scenario, prices decrease and less music is produced. And I don't think anyone wants that.

A colleague of mine theorized that getting free music mitigates - possibly completely - this shift in the demand curve. He thinks that getting free music leads the consumer to purchase new music. I think this argument is weak and an attempt at justification. Consumers are not so irrational that they spend the same amount of money for the same quantity of music whether there is the option to steal music or not. And if it mitigates but not completely, then all we are talking about is magnitude - but the direction of the effect is still the same.

I also think a musician should have the ability to choose to make that investment instead of consumers forcing that situation on them.

Anyway, enjoy the flash back to Econ 101. And feel free to challenge my model or my assumptions.