Industry Structure: Perfect Competition or Market Power Napster vs. The U.S. Recording Industry:

Analysis of the Economic Model of the U.S. Recording Industry

The article "When the Music Stops" by Nick Wingfield in the November 2002 issue of the Wall Street Journal, relates an interview with the founder of Napster, Shawn Fanning, after the death of his company at the hands of the recording industry. Not only does it discuss Napster's creator's future plans and what he thinks is the future of the online music industry, it also provides an insight into the economic principles at work in the recording industry. This paper endeavours to explore the economic principles concerning demand models and the practice of selective collusion among the big recording companies which are alluded to in the article, thereby generating more awareness and understanding in the legal ramifications that ensued from the birth of Napster.

Although the article refers to the collusion of the big recording companies to shut down Napster, the recording industry is one of oligopoly. An oligopoly is defined as:

market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power. Oligopoly is distinguished from perfect competition because each firm in an oligopoly has to take into account their interdependence; from monopolistic competition because firms have some control over price; and from monopoly because a monopolist has no rivals. In general, the analysis of oligopoly is concerned with the effects of mutual interdependence among firms in pricing and output decisions." (http://english.pbc.or.id/glos/o.html)

recording industry is said to be asymmetric, where members of the industry are not of equal size and economic weight. Also, the goods which are produced (CDs from differing artists) implies that the recording industry produces goods that are differentiated and heterogeneous. Two aspects of oligopoly refers to the interaction between company members of this industry. "The first is to assume that firms behave cooperatively. That is, they collude in order to maximize joint monopoly profits. The second is to assume that firms behave independently or non-cooperatively." (http://english.pbc.or.id/glos/o.html).
The article already relates to the reader the collusion between the recording companies in order to shut down Napster.

Napster is a website that, until recently, offered its users free access to musical recordings. It did so with a computer program that links the hard drives belonging to the community of Napster users. The program, in turn, allowed users to search for and download without payment digital files of music found on their peers' computers. Many downloaded files contained songs copied from commercial recordings -- copies made without the permission of the songs' composers, publishers, performers, and record firms. It is not surprising, then, that the Recording Industry Association of America (RIAA) and others filed suit against the website in December 1999, alleging that Napster facilitated copyright infringement. The allegation received support in February 2001, when a court ordered Napster to prevent its users from trading copyrighted music." (Dowd, 2001, 1).

However, the recording companies have only bandied together when their combined monopoly profits are under threat.…