Industry Structure Perfect Competition or Market Power

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) The U.S. 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.

In every other aspect, these companies work independently from each other, invariably affecting market price and buying trends. In 1942], a new record firm broke ranks and introduced a "pro-airplay" business model. Capitol Records executives believed that broadcasting recordings would stimulate rather than harm sales. In search of airplay, Capitol routinely promoted its recordings at radio stations, and it became the first record firm that routinely delivered free recordings to disk jockeys. With a dramatic increase in record sales, Capitol quickly rose to dominance in the record industry.

Unable to ignore Capitol's successful "pro-airplay" model, other dominant record firms begrudgingly ceased their quest for attaining fees from radio stations." (Dowd, 2001, 2). Another economic principle discussed in the article concerns consumer demand models. Fanning states, "I think the [industry's] approach of providing a limited catalog of music, providing services that are significantly below the consumer's expectations, and then simultaneously scaring them from trying to do what they want is the wrong approach.

They really need to try to determine what are the core things that people really love and respect from a music service and make sure they satisfy those needs." (Wingfield, 2002, 2). In the theory of demand and supply, consumers will only purchase what they want. If a company offers them exactly what the consumer wants, it won't matter if it happens to be illegal. There will always be a market to consume that particular good.

"If the marketplace desires a product, it will be provided -- regardless of whether the means of procuring that product is considered illegal. In the absence of nothing, the illegal service will continue." (Scott, 2001, 3). When their very livelihood is at stake, record companies tend to cooperate to shut down their antagonists. However, a situation of independence and aggressive competition exists.