Unchained Melody: A Price-Discrimination-Based Policy Proposal for Addressing the MP3 Revolution

Recent innovations allow Internet users to access and trade digital music files without paying those who have produced the music. MP3 and other data compression algorithms allow digital files to easily fit on hard drives or portable discs, and software such as Napster and Gnutella allow music fans to trade files on the Internet. These new technologies are turning recorded music into a public good, since no one can be prevented from enjoying an inexhaustible supply of digital copies. We may expect private markets to provide less-than-optimal quantities of music as a public good. Indeed, foes of Napster claim that downloads are hurting sales of prerecorded CDs (Stern 2000, A03). Others, such as Napster attorney David Boies, argue that Internet music trading does not hurt sales of prerecorded CDs and may actually enhance them by whetting consumers' appetites for new music (E03). Recent congressional inquiries and civil lawsuits have heightened interest in this question: What effect does Internet music trading have on sales of prerecorded CDs? Controversy aside, Internet music trading demands study because it is a more efficient distribution system than the industry's traditional model.' With no costs of manufacturing, packaging, shipping, or retailing CDs, downloads can be offered at a marginal cost of virtually zero and can be enjoyed by music fans at the cost of just a few minutes of computer time. Internet music trading thus represents a tremendous