Electronic Thesis and Dissertation Repository

Thesis Format

Integrated Article

Degree

Doctor of Philosophy

Program

Economics

Supervisor

Salvador Navarro

2nd Supervisor

David Rivers

Abstract

My thesis consists of three chapters relating to the economics of digital piracy. Digital piracy is a debated topic catching tremendous academic and public attention. My studies contribute to the understanding of the impact of digital piracy on legitimate sales revenue with a focus on the motion picture industry.

In my first chapter, I examine the effects of screener piracy on the movie box office. Screeners are movie copies sent to critics and industry professionals for evaluation purposes. Sometimes, screeners are leaked and made available to download on the Internet. This chapter exploits the plausibly exogenous variation of file sharing/piracy activities caused by screener leaks of Oscar-nominated movies to estimate the impact of movie piracy on box office revenue. Using information on leak dates collected from \textit{thepiratebay.org}, I compare the box office performance of leaked and non-leaked movies both cross-sectionally and employing a difference-in-difference strategy to identify the causal effect of piracy on movie box office. I find evidence that screener piracy reduces the box office revenue of the leaked movie in subsequent weeks. However, the negative impact depends on the timing of leaks. Damages to the total box office for movies with late leaks are much smaller compared to pre-release screener leaks.

One reason behind the lack of consensus regarding the impact of piracy in the empirical literature is the dearth of data on actual piracy activity. Data limitation restricts most empirical researchers to reduced-form and quasi-experimental methods, where estimates on industry loss may be biased due to extrapolation of the local average treatment effects on the population. To deal with the data challenge, in the next two chapters I have collected a dataset of weekly illegal downloads on BitTorrent in the United States from 40,267 torrent files for 255 movies released between March 27th and December 27th, 2015. Being able to directly observe piracy activities, my studies avoid many issues such as measurement error or sample selections which exist in studies using proxies or conjoint surveys.

In my second chapter, I utilize this novel dataset of illegal movie downloads to estimate a random-coefficient demand model of movie consumption. Using counterfactual experiments, I quantify the effects of piracy on movie box office revenue. The model distinguishes two channels of piracy substitution effects: (1) intra-movie substitution effects, which are the focus of most previous literature; and (2) inter-movie substitution effects, which represent the spillover of one title's piracy to the other titles' revenue. While the latter channel has been rarely explored in the literature due to restrictions imposed by data and methods, the novel dataset and demand model allow me to quantify its relative impact. I find that the revenue loss due to piracy's inter-movie substitution is on average 4 times as large as the intra-movie substitution effects. Omitting inter-movie substitution severely underestimates the actual damage of piracy. Other counterfactuals show that piracy reduces the total box office revenue of the motion picture industry by $93 million in total, 1.09% of the current box office.

In my third chapter, I extend the result of my second chapter by considering heterogeneity in the effects of piracy. Based on the data and methodology employed in the second chapter, I utilize information on video quality of illegal files to separate piracy by video quality. Augmented by data on home-video sales, I quantify the heterogeneous effects of piracy by distributional channels and video quality. In addition, a heatedly debated topic on digital piracy is about the potential positive effects of piracy due to channels like word-of-mouth. I incorporate the word-of-mouth effects of piracy in my model and quantify the contribution of piracy's word-of-mouth on movie sales revenue. I find that piracy's effects are large on the home-video market and small on the theatrical market. For high-quality piracy, substitution effects dominate word-of-mouth effects. For low-quality piracy, substitution effects are dominated by word-of-mouth effects which make low-quality piracy a potential promotional tool for studios.

Summary for Lay Audience

One of the significant developments on the Internet is the emergence of peer-to-peer (P2P) file-sharing. In less than 20 years, P2P file-sharing has experienced dramatic growth and has become one of the most common activities on the Internet. The wide use of file-sharing has provided Internet users free and easy access to unauthorized copies of digital content such as movies and music, resulting in a surge in digital piracy. These facts have raised concerns among both policy makers and academic researchers about the economic effects of file-sharing on relevant industries. My thesis consists of three chapters relating to the economics of digital piracy. Digital piracy is a debated topic attracting tremendous academic and public attention. My thesis center around the question: How does piracy affect copyright holders' revenue? My studies contribute to the understanding of the impact of digital piracy on legitimate sales revenue with a focus on the motion picture industry. My studies find that the effects of piracy on box office are smaller than we commonly believed. However, the effects are also more complex than we thought. While the net effect of piracy is negative, pirates can also promote the movie through word-of-mouth. Different types of piracy also have very different effects. These differences require public policy regarding piracy to adjust more flexibly according to those differential effects.

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