On File Sharing With Indirect Network Effects Between Concert Ticket Sales and Music Recordings

Abstract

This article analyzes the interdependency between the market for music recordings on the one side and the market for concert tickets on the other side, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. In a model with two interrelated Hotelling lines, prices in both markets are corrected downward when compared to the standard Hotelling model. In the integrated business model, file sharing has an ambiguous effect on firms' profitability. As file sharing can indirectly increase demand for live performances, overall profits can either increase or decrease, depending on the strength of indirect network effects. Finally, file sharing may induce firms to switch from the traditional business model with two separate firms to an integrated business model where one agency markets both records and concerts (so-called 360° deals).

Notes

¹See also Rasch and Wenzel (2011) for a complementary study of piracy in a two-sided market, albeit in the context of the software industry.

²Our model is also somewhat related to the so-called multi-channel sales literature that analyzes how sales in one channel (e.g., online markets) affect sales in other markets (e.g., traditional “offline” markets) from a management and marketing perspective. See Danaher, Dhanasobhon, Smith, and Telang (2010) for an empirical analysis on piracy and multi-channel sales.

³For simplicity, we have normalized all possible costs (e.g., producing and marketing records & organizing concerts) to zero. Due to our assumption of inelastic demand, introducing linear variable costs would not affect our results. Introducing fixed costs would also not affect our results as long these costs are not too high so that both firms can earn non-negative profits in equilibrium.

⁴To focus on network effects across markets (i.e., between records and concerts of a particular band) we neglect possible direct network effects within markets (i.e., between record sales only). See, for example, Gayer and shy (2006) for a model that considers direct network effects within a market. Note also that the indirect network effect only depends on the share of music lovers that attend the concert of Band i—that is, a record by Band i is more popular the more people visit a concert of this particular Band i. Thus, the strength of the indirect network effect is independent of the market size and the presence of music listeners. The same holds for the indirect network effect from music recordings to the concert market.

⁵The details are provided in the Appendix.

⁶Due to the Hotelling setup, each consumer demands a single unit of a product and, hence, total demand is constant.

⁷The second-order conditions are fulfilled under Assumption 1.