A paper published by the Journal of Political Economy takes a look into the effect file sharing has on record sales over the past couple of years by looking at detailed records of music downloads against the U.S. sales data covering a large number of albums. In the worst case negative estimate, they found that a one standard deviation increase in file sharing would only reduce albums sales by 368 copies per album, which would be negligible in the overall album sales values. Based on the five most precise estimates the paper covers, the maximum consequences file sharing would have resulted in would have been 0.7% in 2002.
The paper finally looks into other factors that may explain the declining music sales, with several plausible candidates. One would be the way the over 14% of music sales shifted from record stores to discount retail stores between 1999 and 2003. As a result, album shipments fell by 301 million, a figure often used to show declining demand for legal music despite album sales falling by only 99 million. This period also covers the end of the time when consumers were buying CDs to replace older formats. Finally, the growth in other forms of entertainment, such as movies and video games more than offset the declining album sales. For example, between 1999 and 2003, the paper reports VHS, DVD and video game sales increased by $8 billion compared with the $2.6 billion reduction in album sales.
Even though the paper only has data up to 2005, they found sales either flat or rising despite how rapidly file-sharing is growing. In 2005, four of the five largest national markets saw a music sales rise, but the overall sales loss reported that year was due to the offset caused by the fifth firm, Sony-BMG, which encountered severe integration difficulties. The effect of file sharing would unlikely have just affected only one firm, at least by this much to cause an overall decline. Finally, for successful artists, the study found that file sharing has such a low impact that it would not affect the number or quality of recordings an artist releases.
For those interested, the full in-depth journal, titled "The Effect of File Sharing on Record Sales: An Empirical Analysis" can be viewed here.
Thanks to John-K for letting us know about this paper, who added: The Journal of Political Economy (Volume 115, Number 1, February 2007) has published a paper by Felix Oberholzer-Gee (Harvard University) and Koleman Strumpf (University of Kansas), explicitly stating that "Downloads have an effect on sales that is statistically indistinguishable from zero. Our estimates are inconsistent with claims that file sharing is the primary reason for the decline in music sales during our study period." The paper is notable for its quantitative methods and its use of P2P server logs.
