Do Consumers Pay Voluntarily? Evidence from Online Music Tobias Regner and Javier A. Barria

1. Do Consumers Pay Voluntarily? Evidence from Online Music Tobias Regner and Javier A. Barria tobias.regner@uni-jena.de j.barria@imperial.ac.uk Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

2. Do Consumers Pay Voluntarily? Evidence from Online Music • Analysis of payment behaviour • Alternative online music label: Magnatune • Customers choose price for an album from a given range • How much do they pay, what makes them pay more ? • Information goods market • Importance of free sampling of experience goods • Non-excludability due to P2P networks • Do Consumers Pay Voluntarily? • Empirical study • Large data set obtained from Magnatune • Field study instead of data from lab experiments • Quantitative analysis Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

3. Magnatune: Music Label and Online Store • Niche music label with 200 artists • Slogan: “We're a record label. But we're not evil.” • Revenues are evenly split between artist and Magnatune • Various genres, relatively unknown artists • no Digital Rights Management • Music files are unprotected • File quality and format is up to customer (MP3, WAV, ..) • Comprehensive pre-purchase access • Free and unlimited streaming as well as online radio service • Not just 30 second snippets • Free sampling of experience goods facilitates discovery of music • Variable pricing • Customers are free to pay what they want • Price range from $5 to $18 • Recommended price/default value: $8 Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

4. Background: Why Voluntary Payments? • Research in Behavioural Economics • Laboratory experiments: ultimatum game, trust game etc. • Individuals consistently deviate from neo-classical self-interest hyp. • Social Preferences • „... assume people are self-interested, but are also concerned about the payoffs of others.“ (Charness and Rabin 2002, QJE) • Other-regarding preferences • Trust and reciprocity • Field study with real life data • External validity of lab experiments can be tested Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

5. Information Goods Markets • Payment moral hazard • Uncertainty of principals with respect to payment of agents • Goods can be consumed, but payment cannot be enforced • Free riders are increasingly difficult to exclude due to increasing popularity P2P networks • Similar to full service retailers’ dilemma against Wal-Mart and online retailers • Experience goods • Uncertainty regarding ex-post utility • Decreased willingness to pay without sampling opportunities • Music needs to be experienced before it can be properly valued • Comprehensive pre-purchase access • Music can be listened to long enough to determine how much it is worth Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

6. Model: Literature • Principal-Agent framework with moral hazard • Fehr, Gächter, Kirchsteiger (1997, Econometrica) • Simple labour market model with firms and workers • Higher effort level when mutual opportunity to reciprocate • Open contract design of Magnatune • M decides whether to allow full pre-purchase access or not • Full access: full ex-post value, limited access: reduced ex-post value • Customers make their purchase/payment decision (kind/nasty) • Kind: voluntary payment (full access) / fixed default price (limited access) • Nasty: minimum payment (full access) / leakage to P2P (limited access) • Social Preferences • Intentions-based approach focusing on reciprocity • Rabin (1993, AER), Dufwenberg and Kirchsteiger (2004, GEB)) • Psychological games framework, beliefs • Geanakoplos et al. (1989, GEB), Ruffle (1999, JEBO) Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

7. Data Set • Sales numbers of the music label Magnatune www.magnatune.com • 14,367 observations in total • Data from September 2003 to January 2005 • 7,620 different customers • Majority (4,986) purchased just one album • Most albums bought by a customer: 49 • On average customers bought 1.86 albums • No reputation effects possible Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

8. Data Set (2) • Customer/artist ID • Payment • Date and time of purchase • Dummies • Gender • Download or CD • Email left or not • Means of payment (credit card, PayPal) • Country • Music genre • Total amount of purchases of customer • Number of a respective purchase of a customer Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

9. Descriptive Stats Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

10. Summary of Results • Payment • Only 2,081 purchases (or 14.5%) were at $5 minimum • Average payment for an album is $8.20 • First payment of customers averages $8.36, 2nd payment averages $8.21 • Regression results (significant at (at least) 5%-level) • Number of purchase affects payment negatively • Anonymous customers tend to pay less (leave no e-mail address) • CD buyers tend to pay more (above and beyond shipping cost) • No difference between male and female customers • Country dummies: + (UK, Switzerland) – (Mexico, Israel) • GDP differences between countries • Currency conversion • UK payments before/after adjustment of range: $8.76 / $8.62 • Genre dummies: • + (Rock, Electronica, New Age, Classical, Christian) • - (Opera) Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

11. Payment over Countries Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

12. Average Payment by Country as a function of GDP per capita Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

13. Results (2) • Dynamic aspects • Sub-sample with at least five purchases • First payment is $8.36, second payment is $8.21, $8.07, $8.00 • Average payment seems to decrease over time • Explanations • Customers realize they can free ride? • Frequent customers apply a ‘bulk discount’ concept? • Marginal willingness to pay decreases • Types of consumers • Clustering of the observed transactions based on previous payment • minimum, default, high (>$12) payment • $5 previous payment, average payment : $5.49 • $8 previous payment, average payment: $8.01 • > $12 previous payment, average payment: $12.29 • Payments type-dependent, subject-specific α Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

14. Payment Patterns of 32 Customers with 15+ Transactions • Default (with deviations): 20 consumers • (quasi-) • minimum: 4 >AVG: 5 Other patterns (decreasing payment): 3 Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

15. Conclusions • Open contract designs encourage people to pay voluntarily: • Free pre-purchase access allows customers to make an informed buying decision • Socially-minded customers see this as kind behaviour and reciprocate • Purely self-interested individuals will free ride anyway • Empirical results • Average payment far higher than the minimum • Average payment even higher than recommended price • Implications • Variable pricing can be a successful concept • BUT: only a niche market has been analysed • Applies well to an early stage in an artist life-cycle model (Regner et al.) • Relatively unknown artists • Experience good aspect is important • Comprehensive pre-purchase access provides exposure • Future research • Underlying motivations for voluntary payments: guilt?, warm glow? • Policy aspects for digital media, DRM Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria

16. Own Thoughts • More convincing evidence of social preferences than any laboratory experiment I’ve seen: - commercial setting, not ultimatum game, which subjects understand is about how to divide a surplus given to them by the experimenter for that purpose - not an experiment at all - strong results • Selection effect? Maybe only fair types pay for music, free riders log in regularly and listen to music for free • Authors attribute high voluntary payments to Magnatune's unlimited music access policy. It could also be that customers recognize that Magnatune’s artists are struggling, unknown & receive 50% of revenues. These same customers might freely cheat Madonna or Pavarotti. Do Consumers Pay Voluntarily? Evidence from Online Music - Tobias Regner and Javier Barria