Downloading Adam Smith

Interesting look in kuro5shin.org at the travails of the recording industry and the rise of illicit downloads from the perspective of economic theory:

the RIAA represents a small cartel of producers who are currently selling their goods (music CDs) at approximately ten times their marginal cost of production. They are doing this by producing only enough quantity of units to satisfy the demands of those consumers willing to pay $15 to $20 per CD. In a free market, larger quantities of CDs would be produced to satisfy the demand of all consumers willing to pay more than the marginal cost of production ($1.50 to $2.00).

Because the market is not free, a large number of consumers exist who would be willing to pay at least $2 but not as much as $15 for a music CD, but have no legitimate means of satisfying that demand. These consumers form a “black market.”

Black markets are created by a lack of freedom in the primary market. In a free market, goods are sold at the marginal cost of production. There will always be consumers willing to pay less than the marginal cost of production, but if a black marketeer were to attempt to sell to these consumers, he would lose money on every sale and quickly go out of business. However, in the music CD market, the RIAA member companies choose not to sell to a group of consumers willing to pay more than the marginal cost of production. This demand is therefore satisfied by the black market.

….So what’s the solution? Simple: The libertarians are right at least in that all markets should be free, including this one. Whenever a market ceases to be free, the overriding concern of government policymakers should be to restore free market pricing as quickly as possible. There are many ways to do this: Demolish the means by which the monopolists limit entry; artificially set prices to the correct level based on taxation, price controls or other regulation; or even enter the market directly, in competition with the monopolists.

In a connected reader’s poll, 35% said they would never download an MP3 again if CDs were priced at $5 – this sounds about exactly right.