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

Napster’s place has been taken by services such as Grokster and Morpheus that
offer peer-to-peer (p2p) file sharing. In their legal battles with the music industry, these
services have argued that they should not be held liable simply becuse their products
might be used to duplicate copyrighted materials illegally. However, in July
2005, the U.S. Supreme Court ruled that the services could be found liable because
they knowingly promoted products that were designed to infringe on the rights of
copyright holders and did nothing to disourage this illegal activity.
So how does all this relate to the concept of incentives? First, free music clearly
creates an incentive for music lovers to download songs rather than pay for them by
buying a CD. This is at the heart of the music industry’s opposition to p2p file sharing.
Second, if record companies cannot charge for their music because it can be
downloaded for free, they have less of an incentive to record new music. According
to the record industry, by reducing the incentive to produce new music, file sharing
will ultimately reduce the opportunities for new musicians to record with major
record labels.
While the effects of free, online file sharing on incentives are clear, the magnitude
of those effects is open to debate. The music industry points to a decline in CD sales,
from 942.5 million CDs in 2000 to 766.9 in 2004, as evidence that the availability of
free downloads has hurt their business. However, critics of the music industry argue
that this decline in sales is simply a reflection of the economic slowdown and rise
in unemployment that began in 2001. Some studies have argued that the availability of
free music downloads might actually increase CD sales. Listening to music online can
actually increase interest in new music and individuals who are able to listen to
music online before buying an album may actually be more likely to purchase CDs.
A study by economists at the University of North Carolina and the Harvard Business
School was unable to find any effect of online access to music on subsequent
CD sales.
Whatever the ultimate outcome of this battle might be, incentives are essential
to understanding the issues. The incentive to avoid paying for music provided by
low-cost or free access reduces the incentive of record companies to discover, record,
and promote new musical talents.
Today’s consumers shop at both
traditional markets and online
markets such as eBay.com.
EXCHANGE
Somehow, decisions that are made—by individuals, households, firms, and government
as they face trade-offs and respond to incen
tives—together determine how the economy’s limited resources, including its land,
labor, machines, oil, and other natural resources, are used. The key to understanding
how this happens lies in the role of voluntary exchange in markets.
Long before the rise of modern industrial societies, the benefits of exchange
were well understood. Coastal societies with access to fishing resources, for example,
would trade some of their fish to inland societies in return for meat and furs.
The coastal group sought meat and furs that were worth more to them than the fish
they gave up; the inland group likewise exchanged meat and furs for fish. Both groups
benefited from voluntary exchange.
10 ∂ CHAPTER 1 MODERN ECONOMICS