A number of major industries – film, music, books, newspapers, etc. – have gone through an enormous structural change in the past 10 years. The vanguard of this change was surely Napster in at the turn of the century. There have been many, many articles published on the effect of Napster on sales, but nothing I would call great – my favorite used German school holidays to instrument for reduced supply of pirated songs when the kids were away from high-speed university connections.
There has been a bunch of BS about piracy spouted by the industry mouthpieces and lobbyists: did you know that the MPAA and RIAA, among other industry lobbying groups, has legal authority to file reports on international piracy with the US Trade Representative (the “Special 301”), and that these utterly ridiculous numbers actually have legislative bite?
While we have numbers on the effect of piracy and sales ranging from decent to industry-supplied terrible, none of us, as economists, actually care about sales, right? Surely the relevant question for economists and for policymakers is whether Napster and its ilk have had positive or negative welfare impact. I am working on this topic right now, in a very general model, but you can imagine the basic difficulty: if we want to know the welfare impact of Honey Nut Cheerios, we need only look at increases in surplus on the demand side, a trick that has been done for the Cheerios case in nice 1990s papers by Jerry Hausman and Aviv Nevo. Napster, on the other hand, has affected both the supply side and the demand side simultaneously, and in nonobvious ways. There are also nonobvious time lags in how the effect is evidenced, so I think there is no way to avoid a fancy structural model and its related bevy of assumptions. Hopefully I’ll have some more to report on this topic by the end of the year, but my preliminary work suggests that mp3 downloading was unambiguously positive for welfare.
What else has been done on piracy and welfare? The only real work on the topic that I know of is this recent paper by Waldfogel. He investigates a much more straightforward question: is the quality of music since Napster better or worse? It’s tough to just look at sales or number of releases: sales are affected both by quality and by piracy, and the number of songs released has surely gone up because the cost of creating new music during the 2000s dropped with the introduction of home music production software.
Waldfogel instead gathers a huge number of “best albums of all time” and “best songs of the era” lists. If a magazine or Zagat’s or a prominent music website put out such a list, he scraped the data. In general, the lists all seem to agree that the 1960s and the early 1990s were the high points of music during the past 50 years. More importantly – and given many caveats – there doesn’t seem to be any decrease in the number of “good” releases since Napster. Further, the “good” releases of the 2000s are just as likely to come from new bands as from bands that were formed before 2000. In my work, I have an alternative method for adjusting for quality over time, but the basic result is the same: music piracy does not seem to have had much affect on the quality of new music.
http://www.tc.umn.edu/~jwaldfog/pdfs/American_Pie_Waldfogel.pdf (Jan 2011 working paper)
A Fine Theorem 
Piracy is a loaded expression. I prefer to think of it as an action which cirvumvents a monopoly.
People often think that dropping quality is somehow retaliatory, the best artists aren’t going to quit because people aren’t paying for their music, they’re still making plenty of money. Artists who are just starting out or artists with lower sales aren’t going to be popular enough to be hurt by it. But it might not be worth it for midlevel people to stay in the business.
I don’t think there is anything inherently monopolistic about it. Additionally there are still venues — though they’re less used — where music is “sold” by people other than the producers legally. The interesting thing is Napster might be providing the same “service” that radio used to (and official youtube channels do,) if a song is popular enough people upload it and it’s free in the same way that it would be if advertisers paid for space. Except there’s no adverts and the only cost is the hidden one for the — usually multi-millionaire — artists (who i’ll admit I have limited sympathy for, since I know far more talented musicians/songwriters) and record companies (who are probably on their way out in the same way that yearbook publishers are… they really should transition to boutique mode sometime soon.)
..but I’d probably better read the paper before I run my mouth any more.
This is not welfare, but these authors show that on the demand side piracy seems to behave in a particular way;
Click to access ms_nbc.pdf
I agree, the question of whether the possibility of piracy *decreases* the potential quality and quantity of future creative work is central to discussions about welfare implications.