Essays on the Economics of Digital Piracy
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Western University Scholarship@Western Electronic Thesis and Dissertation Repository 9-26-2019 4:00 PM Essays on the Economics of Digital Piracy Zhuang Liu The University of Western Ontario Supervisor Salvador Navarro The University of Western Ontario David Rivers The University of Western Ontario Graduate Program in Economics A thesis submitted in partial fulfillment of the equirr ements for the degree in Doctor of Philosophy © Zhuang Liu 2019 Follow this and additional works at: https://ir.lib.uwo.ca/etd Part of the Industrial Organization Commons, Management Sciences and Quantitative Methods Commons, and the Marketing Commons Recommended Citation Liu, Zhuang, "Essays on the Economics of Digital Piracy" (2019). Electronic Thesis and Dissertation Repository. 6765. https://ir.lib.uwo.ca/etd/6765 This Dissertation/Thesis is brought to you for free and open access by Scholarship@Western. It has been accepted for inclusion in Electronic Thesis and Dissertation Repository by an authorized administrator of Scholarship@Western. For more information, please contact [email protected]. Abstract My thesis consists of three chapters relating to the economics of digital piracy. Digital piracy is a debated topic catching tremendous academic and public attention. My studies contribute to the understanding of the impact of digital piracy on legitimate sales revenue with a focus on the motion picture industry. In my first chapter, I examine the effects of screener piracy on the movie box office. Screeners are movie copies sent to critics and industry professionals for evaluation purposes. Sometimes, screeners are leaked and made available to download on the Internet. This chapter exploits the plausibly exogenous variation of file sharing/piracy activities caused by screener leaks of Oscar- nominated movies to estimate the impact of movie piracy on box office revenue. Using information on leak dates collected from thepiratebay.org, I compare the box office performance of leaked and non-leaked movies both cross-sectionally and employing a difference-in-difference strategy to identify the causal effect of piracy on movie box office. I find evidence that screener piracy reduces the box office revenue of the leaked movie in subsequent weeks. However, the negative impact depends on the timing of leaks. Damages to the total box office for movies with late leaks are much smaller compared to pre-release screener leaks. One reason behind the lack of consensus regarding the impact of piracy in the empirical literature is the dearth of data on actual piracy activity. Data limi- tation restricts most empirical researchers to reduced-form and quasi-experimental methods, where estimates on industry loss may be biased due to extrapolation of the local average treatment effects to the population. To deal with the data challenge, in the next two chapters I have collected a dataset of weekly ille- gal downloads on BitTorrent in the United States from 40,267 torrent files for 255 movies released between March 27th and December 27th, 2015. Being able to directly observe piracy activities, my studies avoid many issues such as measurement error or sample selections which exist in studies using proxies or conjoint surveys. In my second chapter, I utilize this novel dataset of illegal movie downloads to estimate a random-coefficient demand model of movie consumption. Using counterfactual experiments, I quantify the effects of piracy on movie box office ii revenue. The model distinguishes two channels of piracy substitution effects: (1) intra-movie substitution effects, which are the focus of most previous lit- erature; and (2) inter-movie substitution effects, which represent the spillover of one title’s piracy to the other titles’ revenue. While the latter channel has been rarely explored in the literature due to restrictions imposed by data and methods, the novel dataset and demand model allow me to quantify its relative impact. I find that the revenue loss due to piracy’s inter-movie substitution is on average 4 times as large as the intra-movie substitution effects. Omitting inter-movie substitution severely underestimates the actual damage of piracy. Other counterfactuals show that piracy reduces the total box office revenue of the motion picture industry by $93 million in total, 1.09% of the current box office. In my third chapter, I extend the result of my second chapter by considering heterogeneity in the effects of piracy. Based on the data and methodology em- ployed in the second chapter, I utilize information on video quality of illegal files to separate piracy by video quality. Augmented by data on home-video sales, I quantify the heterogeneous effects of piracy by distributional chan- nels and video quality. In addition, a heatedly debated topic on digital piracy is about the potential positive effects of piracy due to channels like word-of- mouth. I incorporate the word-of-mouth effects of piracy in my model and quantify the contribution of piracy’s word-of-mouth on movie sales revenue. I find that piracy’s effects are large on the home-video market and small on the theatrical market. For high-quality piracy, substitution effects dominate word- of-mouth effects. For low-quality piracy, substitution effects are dominated by word-of-mouth effects which make low-quality piracy a potential promotional tool for studios. Keywords: Industrial Organization, Digital Piracy, Intellectual Property Rights, Word-of-mouth, File-sharing, Motion Picture Industry iii Summary for Lay Audience Nowadays, technology like file-sharing makes it very easy to get illegal copyrighted content on the Internet. The digital piracy problem has attracted a great deal of public attention. There are concerns that digital piracy might kill the creative content industry. My thesis examines the impact of digital piracy on legitimate sales revenue using data on the motion picture industry. I find that the effects of piracy are more complicated than we used to be- lieve. First, I find that screener piracy accidents reduced leaked movies’ box- office. The effects are more pronounced for pre-release leaks. Second, using actual downloads data on movies, I find that piracy of one movie also nega- tively affects the revenues of other movies in theaters at the same time. Third, I find that the negative effects of piracy depend on a lot of factors. Physical home-video market revenues are heavily affected by piracy, but the negative effects on theatrical market revenue are very small. High-quality piracy with high resolution is mainly responsible for the lost sales, while low-quality piracy can be used as a promotional tool if we consider the word-of-mouth produced by pirates. In the end, the results suggest that the effects of piracy are very different. The conclusion we draw regarding piracy in one industry may not be easily extended to the others. Public policy on digital piracy should be cautious about over-generalizing evidence from other industries. iv Contents Acknowlegements ii Abstract iii Summary for Lay Audience v List of Figures ix List of Tables x 1 Introduction 1 2 Screener Leaks and the Impact of Movie Piracy 4 2.1 Introduction . 4 2.2 Literature Review . 6 2.3 Data . 8 2.3.1 Data Collection . 8 2.3.2 Descriptive Statistics . 9 2.4 Pre-analysis Checks . 12 2.4.1 Balance Test . 14 2.5 Cross-sectional Evidence . 15 2.5.1 Leaked vs. Non-leaked . 16 2.5.2 Early Leaks vs. Late leaks . 19 2.6 Difference-in-Difference Analysis . 21 2.6.1 Empirical Specifications . 21 2.6.2 Results . 22 2.6.3 Heterogeneous Effects by Rating . 23 2.7 Conclusion . 25 v 3 Intra-movie and Inter-movie Effects of Piracy 27 3.1 Introduction . 27 3.2 Literature Review . 30 3.3 Background: File sharing and BitTorrent . 32 3.4 Data . 34 3.4.1 Data Description . 34 3.4.2 Descriptive Statistics . 35 3.5 Inter-Movie Substitution Effects of Piracy . 38 3.6 Model . 39 3.7 Estimation Procedure and Result . 46 3.7.1 Estimation Procedure . 46 3.7.2 Estimation Results . 48 3.8 Counterfactual Experiments . 51 3.8.1 Estimate Industry Loss . 51 3.8.2 Decomposing Inter-Movie Substitution and Intra-Movie Substitution . 53 3.9 Conclusion . 55 4 Quantifying the Heterogeneous Effects of Piracy 57 4.1 Introduction . 57 4.2 Data . 60 4.2.1 Data Description . 60 4.2.2 Preliminary Data Pattern . 61 4.2.3 Summary Statistics . 66 4.3 Model . 68 4.4 Estimation Results . 75 4.5 Counterfactual Experiments . 79 4.5.1 Full Removal: Heterogenous Effects by Distribution Channels . 79 4.5.2 Partial Removal: Heterogenous Effects by Video Quality 81 4.5.3 Positive Word-of-mouth Effect from Piracy . 84 4.6 Conclusion . 84 A Chapter 2 Appendices 94 A.1 Additional Test: Are Popular Movies Leaked Earlier? . 94 vi B Chapter 3 Appendices 97 B.1 Preliminary Evidence . 97 B.2 Substitution Patterns . 99 B.3 Collection of File sharing Data . 99 B.4 Reliability of the Download Estimates . 104 B.5 List of Trackers . 105 vii List of Figures 2.1 Pattern of Correlation between Box office and Leaks over Time 10 2.2 Cross-Sectional Comparison: Effects of Leak Timing on Total Box-office............................ 20 3.1 file sharing Activities in the World . 35 3.2 Average Weekly Audience and Downloads per Movie by Weeks after Release . 40 3.3 Downloads Composition by Theatrical Availability for Top 50 Downloaded Movies . 41 3.4 Growth of Average Implied Unobservable Quality ∆ξ jt for Pi- rated Products by Tenure . 50 4.1 Torrents Files Format Distribution . 63 4.2 Theatre Admission, DVD Unit Sale and Downloads by Weeks after Release . 64 4.3 Frequency Distribution of Consumer Taste for Pirated . 78 A.1 Mean Daily Search Volume by Time to Leaks .