Measuring the Effect of Digital Technology on the Sales of Copyrighted Goods: Evidence from Napster

This paper measures the effect of file sharing on equilibrium record sales. Previous research has suffered from little direct information on who downloaded music and how much their music expenditures changed. This paper uses the introduction of Napster and exploits two household-level data sets. I begin with a difference-in-differences approach, treating the presence of Napster as a technological event that only Internet users experienced. To account for compositional changes in Internet users as well as the likely relationship between music expenditure and the propensity to adopt the Internet, I improve upon nonparametric matching methods. Because of confounding factors due to other new online activities, I additionally combine two datasets. Taken together, the results suggest that file sharing explains 20% of total sales decline, which is driven by households with children aged 6-17.