ESTIMATING THE WILLINGNESS TO PAY FOR DIGITAL MUSIC

I. INTRODUCTION For much of their existence, the media industries (in particular, the software, music, and film industries) have strived to find solutions to combat copyright piracy. Using most recent data available, losses from copyright piracy are estimated to exceed US$70 billion annually, with software piracy accounting for $48 billion (Business Software Alliance (BSA), 2007), music piracy for $4.5 billion (International Federation of the Phonographic Industry (IFPI), 2006), and movie piracy for $18.2 billion (Movie Picture Association of America (MPAA), 2006) per year. As demand for technology goods expands in developing and emerging countries, copyright piracy will continue to persist if effective strategies are not implemented to address the problem. While there is general consensus in the literature that the use of economic incentives (carrots) are effective in reducing copyright piracy, the media industries still extensively use enforcement actions (sticks), or the threat of such actions (Bhattacharjee et al., 2006). Such actions include litigation against users of peer-to-peer technologies, premovie and concert warnings regarding illegal recordings, television commercials illustrating the harm of piracy, and increased government action against countries that allow mass-duplicated media files to be sold in black markets and on the Internet. Meanwhile, strategies to increase legal consumption have sprouted, including versioning, bundling, and sublicensing of software, Internet sales of digital music (e.g., iTunes), and simpler ways to rent movies via the Internet (e.g., Netflix). This article presents a conceptual model of identifying how economic and enforcement strategies affect the extent to which individuals participate in the legal and illegal markets for copyright goods. An empirical study by Zentner (2006) found that music file sharing (illegal market participation) led to a 30% reduction in the likelihood of music purchases (legal market participation). A subsequent study by Oberholzer-Gee and Strumpf (2007) found no effect of file sharing on music sales, though Lie-bowitz (2007) presented an extensive critique against their conclusions. While reducing participation in the illegal market can decrease piracy, revenues will not increase unless consumption in the legal market, which we associate with an increase in the willingness to pay (WTP), subsequently increases. Because of differences in the legal and illegal markets for copyright goods, we must take into account both WTP and the corresponding value of acquiring copyright goods in the illegal market, which is influenced by nonpecuniary factors such as risk, quality issues, ethics, and time. These factors play an important role in determining which market individuals ultimately choose. Following the conceptual model, we present an empirical analysis to estimate the determinants of WTP and their marginal effects using survey data focusing on music consumption among university students. Our findings are straightforward but important: we find that income and risk perceptions play a dominant role in influencing WTP. We also find that ethics strongly and positively influence WTP, which is consistent with the growing acceptance of fee-based music (e.g., iTunes). With significantly expanding song catalogs, online music stores have become a viable substitute to peer-to-peer file sharing. These findings build upon those in the existing literature by moving beyond the factors that solely influence piracy and focusing on the effect of sustaining the market for legally purchased music. The remainder of the article is as follows: Section II provides a literature background that leads to the conceptual model in Section III. Section IV describes the survey data. Section V presents the empirical framework, while Section VI presents the results and marginal effects on WTP. Finally, Section VII concludes. II. BACKGROUND There is a substantial literature focusing on the determinants of copyright piracy in the software and music industries (Varian, 2005). …