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The Effect of Napster on Recorded Music Sales: Evidence from the Consumer Expenditure Survey

Jan 2004
Working Paper
03-018
By  Seung-Hyun Hong
This paper quantifies the magnitude of changes in household-level expenditures on recorded music in the United States, particularly attributed to the emergence of Napster. Exploiting the rich information contained in the Consumer Expenditure Survey, I use three approaches to measure the effect of Napster. The difference-in-difference kernel matching (DDM) method directly quantifies the effect. I find that the quarterly music expenditure of the average U.S. household has declined by approximately three dollars as a result of using the Internet and plausibly Napster. This accounts for 39% of the decrease in total recording sales in 2000. The second approach estimates a demand system for entertainment goods. The estimated cross-price elasticities imply that changes in prices of other entertainment goods also explain the slump in recorded music sales. In 2000, roughly 37% of the decline in recording sales is due to such changes in prices. The final method constructs synthetic cohorts. The results indicate that transition from LPs to CDs might describe the increase in music sales during the 1990s as well as the recent slowdown. These two other methods indirectly measure the effect of Napster in that they explicate that more than 80% of music sales decrease in 2000 might have resulted from factors aside from Napster. This implies that the estimated magnitude using DDM may quantify changes in the household-level music expenditure due to not only Napster but also factors other than file-sharing of copyrighted music.