The Impact of Licensed and Unlicensed Free Goods: An Empirical Analysis of Music, Video, and Book Industries in Japan

Abstract

The current progress in digitization and the development of information and communication technologies dramatically changed the creative industries’ business model. Although new free goods spread broadly as technology develops, economists and company managers are very interested in the impact free goods have on their paid goods. Considering their complementary and substitution effects, we discuss the impact of official and informal free goods on the consumption of paid goods in three creative industries in Japan. We employ an instrumental variables method and a large questionnaire data set. Official free goods have a significant positive effect on paid goods in the music industry, with an elasticity of 0.11, but no significant effect in the video and book industries. Informal (pirated) free goods have no significant effects in the book industry, but have a significant negative effect in the music and video industries, with elasticities of -0.23 and -0.19, respectively. The above results imply that, employing the business model of offering free goods is a useful strategy in the music industry. On the other hand, the supply of informal free goods affects the producers in the music and video industries negatively.