Abstract
The paper analyses the behaviour of customers of the online music label Magnatune. Customers may pay what they want for music albums, as long as the payment is within a given price range ($5-$18). We study the relationship between artists/labels and customers and use a moral hazard model for our analysis. It considers social preferences and also the importance of free sampling of experience goods. Magnatune's comprehensive pre-purchase access facilitates music discovery and allows an informed buying decision setting it apart from conventional online music stores. We conclude that this open contracts design can encourage people to make voluntary payments. The results of our empirical analysis validate this, as the average payment is $8.20, far more than the minimum of $5 and even higher than the recommended price of $8.
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