Robin Hanson and Bryan Caplan have noted recently that when it comes to regulation people are biased against large producers, and that this doesn’t make any sense. In most markets this is certainly the case. For instance, there is no reason why a locally owned mom-and-pop grocery store should be less regulated than Walmart, and yet Walmart faces much greater opposition when they want to build in a community. However, when it comes to music and other entertainment laws and regulations favoring small producers can be efficient.

The optimal copyright policy would ensure that any possible products for which total benefits (social plus private) are greater than total costs are created. For large producers, e.g. the most popular artists, the profits they receive are more likely to exceed the minimum amount needed to incentivize them to create. For small artists this constraint is much more likely to be binding, and products with positive net value are unlikely to be created due to suboptimal copyrights.

Imagine, for instance, how much additional music would be created if small artists could perfectly price discriminate, meaning they could charge the maximum that each individual consumer would be willing to pay. Now consider how much more superstars would be willing to create if they could do the same. The latter will be much less marginal creation due to wealth effects -meaning the richer artists are the more they’ll want leisure over work- and because they are more likely to be producing closer to a quality adjusted full capacity.

This suggests that if it increases profitability of small producers at the expense of large ones, illegal downloading may be welfare enhancing. A new NBER paper in fact supports this notion. The authors argue that music piracy decreases the demand for recorded music from all artists, but increases the demand for live performances for small artists but not large, well-known artists. Here is the abstract:

Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.

Given the logic above, these results suggest that illegal downloading may be welfare enhancing.