Review of Industrial Organization 20: 151–161, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Peer-to-Peer File Sharing: The Case of the Music
PETER J. ALEXANDER
Federal Communications Commission, Washington, D.C., 20554, U.S.A.
Abstract. The music recording industry is a highly-concentrated ﬁve ﬁrm oligopoly. Much of the
dominance achieved by larger ﬁrms in the industry results from control over the distribution and
promotion of the pproducts of the industry. Alexander (1994b), predicted that new compression
routines would facilitate the efﬁcient transfer of digital music across the internet. MP3 compression
routines have made such transfers relatively simple and efﬁcient. While smaller new entrants have
not yet been able to exploit this new technology in terms of market share, an element of uncertainty
exists regarding the sustainability of the prevailing structure, due to large scale non-sanctioned ﬁle
sharing. Despite the industry’s legal efforts to suppress non-sanctioned ﬁle distribution, peer-to-peer
networks may render these efforts futile. However, peer-to-peer networks must overcome structural
and institutional problems, in particular, free-riding.
Key words: Digital ﬁle sharing, free riding, MP3, music industry, Napster, SDMI.
In this paper, we explore the relationship between digital distribution and market
structure in the music recording industry. While standard theory predicts that new
technology generates increasing scale and hence increased concentration, there are
salient anomalies that have emerged, especially in the arena of electronic com-
merce. Such is the case with the music recording industry. In fact, new digital
distribution technologies threaten to undermine the prevailing structure of the in-
dustry by facilitating the free exchange of digital music ﬁles between consumers
with computers and internet connections (Alexander, 1994b).
The industry has responded to large-scale organized digital ﬁle sharing by
taking legal action against the most prominent and sizable digital ﬁle distribut-
ors, notably MP3.com and Napster.com, and has received some legal relief. For
example, MP3.com was found liable in U.S. District Court for infringing the
I thank William G. Shepherd and Brendan M. Cunningham for their many thoughtful comments.
The views expressed in this paper are those of the author, and do not necessarily represent the views
of the Federal Communications Commission, the Chairman or any of its Commissioners, or other
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