[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

gal activity, and on the other side are the companies producing the software that
allows file sharing and the millions of music lovers who do not want to pay for music.
The debates now also encompass the movie industry, as digitized movies can be
shared as easily as music files. The legal battle between MGM and Grokster, a distributor
of peer-to-peer file-sharing software, reached the United States Supreme
Court in 2005.
Incentives are at the heart of the case against file sharing. Record companies
make money by selling CDs. They, or the artists who create the music, hold copyrights
that give them the right to charge others for its use. Copyrighted material,
which includes books like this text as well as music, cannot be distributed or sold
without the permission of the copyright holder. In that way, the holder of the copyright—the
book publisher, author, artist, composer, or record company—is able to
limit access to the material and charge a fee for its use. When music could only be
copied by physically duplicating a tape recording or burning a CD, it was costly to
make illegal copies. While people might burn a CD to use in the car or give to a
friend, this type of sharing was relatively minor, and something the music industry
tolerated.
The advent of digital music changed the situation dramatically. Now, a music file
can be shared with millions of other listeners. In 1999, Napster introduced a filesharing
service that focused exclusively on music. In the process, Napster helped to
popularize the MP3 format; by February 2001 the service had over 26 million users
worldwide. Napster also quickly attracted the attention of the record companies,
who sued Napster for distributing copyrighted music without paying royalties to the
copyright holders. In 2001, Napster settled the lawsuit, agreeing to pay $26 million
to the music copyright holders. Faced with paying this huge fee, Napster declared
bankruptcy in 2002. It has recently converted itself to a subscription service for
downloading music legally.
Thinking Like an Economist
INCENTIVES AND THE PRICE OF AOL
Today, most online services such as AOL charge their customers
a fixed monthly fee for Internet access. In the earlier
days of the Internet, the access charge was commonly based
on how many minutes the member was connected to the
Internet. In 1997, AOL announced that it would change its pricing
policy and move to a flat monthly fee with unlimited minutes
of connect time. AOL’s servers were quickly overwhelmed
and members found it almost impossible to log on. Why?
Because charges were no longer based on the number of minutes
a member was logged on, many customers never logged
off. Once connected, they simply left AOL running, tying up
its modem capacity. When members had to pay on a per-minute
basis, they had an incentive to log off when the service was
not being used. The flat fee left no incentive to economize on
connect time. Thinking about incentives would have shown
AOL that it needed to greatly increase its modem capacity
before announcing the new pricing plan.
WHAT IS ECONOMICS? ∂ 9