Profit Leak? Pre-Release File Sharing and the Music Industry

Using data from an exclusive file-sharing Web site that allows users to share music files using the Bit Torrent protocol, I exploit exogenous variation in the availability of sound recordings in file-sharing networks to isolate the causal effect of file sharing of an album on its sales. Using within-album variation in illegal downloads and sales, I find that the effect is essentially zero: The elasticity of sales with respect to illegal downloads is one-tenth of one percentage point. However, the finding that file sharing is not harmful to individual artists is not inconsistent with the well-documented fact that file sharing is harmful to the music industry (the fallacy of composition). More important, I find that file sharing benefits more established and popular artists who are signed to major labels, which is consistent with recent industry trends.