Wednesday, May 20, 2015

Two Charts on Film Piracy

What follows is an excerpt of the results of a longer paper on The Effect of Increased Availability of Online Piratable Copies of Films on Box Office Revenue. The availability of screener copies online almost immediately for films released late in the year provides an exception to the rule of normal windowing, and the paper attempts to exploit this anomaly to discover whether the immediate availability of high quality piratable copies of films still in theaters affects box office revenue.

The films were first broken into two groups by year of release: Group 1 (1990-2002) and Group 2 (2003-2015. The groups were chosen to delineate between periods of growth in Internet film piracy, specifically the development of the protocol BitTorrent in 2003 (Dahaner and Waldfogel 2012). Before BitTorrent, film piracy via the Internet was more difficult because the large file sizes made it inconveniently slow. The new protocol, however, allows for much faster transfer of large files making downloading movies more feasible. These groups were then subdivided by month and the mean worldwide box office revenue number for each month was calculated. The result of these calculations is seen in Chart 1.

Recall that the relationship sought is the difference in revenue for end of year movies as piracy became more prevalent. The data do indeed show a decrease in revenue from November to December, but a drop occurred during between those months in both time periods. The magnitude of the change is especially relevant to this analysis; the change for each time period is shown in the table below.

Tuesday, May 19, 2015

How the Internet Changes Sharing

What follows is an excerpt of the results of a longer paper on The Effect of Increased Availability of Online Piratable Copies of Films on Box Office Revenue. The paper goes on to use the framework described below to conduct some analysis of the film piracy. The results are available in the the full paper and will also be part of a later post.

It is impossible to tell merely from the presence of sharing whether each participant values the good in question more than its full price; we can only say that he values the good more than the price required of him by the group plus the transaction costs associated with forming and participating in the group.

Transaction costs are an essential factor in examining whether and which groups form. These account for costs associated with gathering information, finding people who want to join a group, and determining what good or goods the group will consume. The magnitude of transaction costs can be diminished by technology, such as the Internet. If there is insufficient technology to overcome transaction costs, then sharing groups cannot form. For example, groups are limited by geography; I cannot easily share a DVD with someone 100 miles away from me without spending large amounts of time and money to meet up with him. Those transaction costs are high enough to keep sharing from occurring. That is, they are too high until transportation technology enables travel to take place at an affordable price, thus overcoming the time and money cost of traveling great distances.

Given all this, it is safe to say that sharing will occur when multiple people (with sufficiently low transaction costs and the technology to overcome them) each value a good less than its price, but the sum of how much they value the good exceeds its price. 

Sharing may also occur even when a participant values the good more than its price. Because each buyer wishes to minimize his opportunity cost, he will enter into a sharing-group if doing so will decrease his cost more than it would decrease the marginal utility of the good. This decrease in marginal utility will necessarily occur, when the good in question is rivalrous, because of transaction costs.

Given that people often act in groups to consume a good, there are two basic ways those groups can acquire that good. Either all (or some fraction) the members of the group pay part of the costs or one member pays the cost for everyone else.

All Members Pay (AMP) Groups

Before the proliferation of the Internet, transaction costs typically limited the size of sharing groups to a few people who already knew each other; e.g. you and your friend combine to buy a DVD. The cost of the DVD and the revenue to the seller is half of what it would be if you had each bought your own DVD. For any sharing group, the cost to the participants and the revenue to the producer is equal to 1/n  (where n the number of participants in the group) the cost and revenue if each member bought a separate instance of the good. While the producer would prefer greater revenue by selling a separate good to each member of the group, his net revenue is only decreased if more than one member of the group already valued the good more than its full price, meaning that they would have purchased it anyway if the group had not allowed them to minimize their cost.

One Member Pays (OMP) Groups

In some cases, groups involve one individual paying the full price for a good and sharing it with multiple other people who pay no portion of the price of the good. For example, one might buy a DVD and screen it for three friends. In such a scenario the effect on producer revenue is the same as in AMP groups because all members of the group consume the good even though he has sold only one instance of the good. The effect on the consumers’ values is altered in an OMP group, however. The non-paying members get to consume the good without paying the producer anything and with only the opportunity cost associated of spending time watching the film instead of doing something else and transaction costs associated with the existence of the group in the first place (both of which would still exist even if they had to pay). The paying member does bear the brunt of the cost, but he also derives social value either by increased esteem from his friends or simply from his enjoyment of the experience or something else. 

Enter the Internet