TCS Daily

Wasting Away Again in Free-Riderville

By James D. Miller - February 9, 2004 12:00 AM

We're moving from the glories of the information age to the pitfalls of free-riderville. Free riders take advantage of other's efforts without contributing anything themselves, and they threaten the music, movie, book and pharmaceutical industries.

When you listen to music without paying you don't directly harm musicians but you don't support them either. As more people escape payments through illicit downloads, less capital will go into the music industry, reducing its output. Sadly, demographics dictate a steady increase in music free riding.

Forty-nine percent of 12 to 22-year-olds downloaded pirated music during a one-month period in 2003, according to a Forrester Research survey. And 51% of those downloaders admitted to buying less music as a result. Those who have come of age in a time of "free music" seem willing and able to steal. Unless this changes, piracy will likely destroy the for-profit production of music.

Legal downloading services like iTunes might solve our piracy problem, but it's too soon to tell. Since these services must obviously charge more than the free file-sharing services do, they will never extinguish music piracy. Also, since illegal file-sharing operations don't advertise, many people don't use their services because they don't realize you can acquire music from the Internet. By advertising the availability of Internet music downloads, iTunes might actually increase music piracy among older Americans. Finally, competition with illegal file sharing will inevitably cause iTunes-like services to charge lower prices, resulting in their earning less profit. Consequently, the free-riding possibility of obtaining pirated music will cause music companies to earn fewer profits even from people who use legal services like iTunes.

If free riding threatened just Britney Spears' lifestyle, few people would care, but it also endangers the movie, book, and pharmaceutical industries. As broadband access proliferates, more music downloaders will copy pirated movies. If e-books ever become commonplace, piracy will also harm the book industry. Most ominously, however, free riding reduces pharmaceutical research.

When nations impose price controls on pharmaceuticals they free ride off of American drug consumers. The cost of pharmaceuticals can be broken up into the cost of making the actual pills and the expense of researching and testing (to government authorities' satisfaction) the chemical formula behind each pill, and the expenses of advertising the medicine. Price-restricting nations try to set prices that cover only the cost of manufacturing the pills, but exclude the expense of testing and research. As a result, they hope countries like the U.S., which don't yet impose price controls, will pay drug research costs.

Understandably, Americans are growing tired of subsidizing the world's medicinal drug habit. Some Americans are trying to buy pharmaceuticals from the drug free-riding nation of Canada because drugs are so much cheaper in Canada than in the U.S. Of course, pharmaceutical companies object to Americans paying only Canadian prices. The pharmaceutical giant Eli Lilly is restricting drug sales to Canada to prohibit Americans from getting Lilly's products from Canadian pharmacies. I predict that if Americans start buying vast quantities of drugs through Canada pharmaceutical companies will threaten to stop supplying Canada, causing the Canadian government to prohibit Americans from buying drugs through Canada. Of course, the U.S. Congress might then respond by imposing Canadian-like price controls on pharmaceuticals. Such price controls would essentially result in every Western nation attempting to free ride off of every other nation, probably causing the collapse of the pharmaceutical industry.

Wealth Generation Today

Pharmaceuticals, like music, movies, and books, are largely information. Once you figure out the correct formulas behind these products and make one copy, you can cheaply replicate these informational goods. The economic glory of cheaply replicated goods arises from the ability of companies to sell them throughout the world. Firms, theoretically, should be able to put tremendous amounts of resources into developing these informational products because they could then cheaply copy them to sell to a world audience. Consequently, profit-seeking capitalists should be very attracted to the information goods sector.

Alas, free riding reduces the profitability of selling information goods. Businesspeople might come to prefer difficult-to-replicate products because they aren't as easily threatened by free riders. As a result, free riding causes an inefficient allocation of resources away from informational products.

In researching this article I surveyed 61 of my students from Smith College and the University of Massachusetts and discovered that 92% of them had downloaded pirated music and only 26% considered such downloading morally wrong.

When I discuss music piracy in class, however, I can't tell them that piracy abstinence is in their interest. It would be stupid for my students to steal CDs from a brick-and-mortar record store because they might get caught and have to pay a substantial penalty. But since they can steal a few songs without any real risk using file sharing, online theft is in their self-interest. Indeed, even if a student believes that online music piracy will decimate the record industry she is still better off stealing because regardless of her actions, most of her classmates will continue to engage in piracy. And if nearly everyone else is stealing, why shouldn't she?

So, how can we shield intellectual property from free riders? To protect pharmaceutical rights the U.S. must stop other governments from imposing drug price controls, perhaps by negotiating appropriate restrictions into trade agreements. Or, more Machiavellianly, we could penalize and deter pharmaceutical free riding by imposing price controls on products from nations that impose price controls on U.S. companies' wares.

Protecting music, movies and books from free riders will be much more difficult because their theft is harder to detect. In the short run we could increase the cost of piracy by imposing criminal and civil punishments on free riders while simultaneously offering legal downloading services like iTunes. The greater the punishments imposed on pirates, the more people will pay for legal iTune-like services.

Rather than just punishing individual pirates, however, we could also deter those who facilitate piracy by, for example, allowing intellectual property companies to legally hack into file sharing networks. Also, since so much intellectual property theft takes place through college computer networks, (and since so many colleges are run by leftists hostile towards corporate private property) we could significantly reduce piracy by imposing gatekeeper liability on colleges. Indeed, liability fears probably motivated Penn State University into paying for a legal music downloading service allowing their students to freely download music, thereby giving students no reason to use illegal file-sharing. In the long run, however, I fear undetectability will make it overly onerous to protect music, movies and books from digital free riders.

Soon, I suspect, you will be able to transmit large files directly from one portable computing device to another thereby bypassing any Internet detection mechanism. When one person can quickly get 100 songs from her friend's cell phone, then piracy will become unstoppable unless we build spying devices into all computers. Even such a draconian response, however, probably wouldn't stop piracy as it would create a black market in devices and software that could overcome such copyright snoopers.

You can digitally copy any song you can hear. If, therefore, in the near future music copyright protectors won't be able to monitor digital transmissions then technology can't possibly offer any long-term solution to the problems of music free riding.

James D. Miller writes The Game Theorist column for TCS and is the author of Game Theory at Work. He last wrote for TCS about President Bush's immigration plan.


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