Results

We report the results from the estimation of Equations (3) and (6) in Table 5. We summarize our findings in sections 5.1. and 5.2., respectively.

>>> Table 5 about here <<<

5.1. The effect of Internet piracy on music sales

Model 1 presents the results from the estimation of Equation (3), i.e., without the interaction effects. As can be seen, the broadband coefficient is negative and highly significant. The as-sociated effect size suggests that a 1 percentage point increase in broadband Internet penetra-tion on average reduces per capita sales by .0300 units. In 2010 the average broadband Inter-net peInter-netration was approximately 20%. This means that file-sharing (via broadband InterInter-net penetration) overall accounts for a decline in sales of approximately .60 units per capita over the observation period (i.e., 20*(–.0300)). Given that the actual sales decline was about .91

12 As a validity check, we test whether any of the other explanatory variables in our model are endogeneous, which is not the case (i.e., the coefficients of the correction terms were insignificant).

units per capita, this corresponds to a share of 66% of the overall sales decline (i.e., .60/.91).

Another interpretation is that 36% of the sales volume in 1996 (1.66 units per capita) has been cannibalized by Internet piracy (i.e., .60/1.66).

5.2. The effects of control variables on music sales

Investigating the coefficients of the control variables reveals that (dial-up) Internet adoption is negatively related to music sales. This finding provides support for our expectation that the Internets function as a new entertainment medium causes music sales to decline, albeit not as severely as the displacement effect due to Internet piracy (i.e., broadband adoption). The magnitude of this effect suggests that a 1 percentage point increase in Internet penetration on average reduces sales by .0069 units per capita. In contrast, although the coefficient shows the expected sign, cell phone penetration does not have a significant influence on music sales.

Turning to the product related covariates we find that the price variable is negatively re-lated to music sales. This finding shows that increasing prices are associated with decreasing demand and vice versa, as expected. Recall that the average retail price declined by approxi-mately 28% over the observation period. Thus, lowering prices has positively impacted sales during this period. Note that the associated endogeneity correction parameter is insignificant, suggesting that after controlling for country- and time-specific fixed-effects, the degree of remaining intertemporal price endogeneity is rather low, which might also be explained by the high aggregation level of our data.

Moreover our results provide evidence that the unbundling of music albums via legiti-mate digital sales channels negatively influences overall music sales. Consumers appear to increasingly replace music album purchases with single track downloads – a finding that is in line with previous micro-level research (Elberse 2010). The magnitude of the coefficient sug-gests that a 1 percentage point increase in the sales share of single music formats decreases

the overall sales volume by .0280 units per capita. The single share of sales in our sample in 2010 was 4.4%, up from 2.5% before the first legitimate digital download store was intro-duced in 2003. Thus, unbundling on average accounted for a sales decline of approximately .05 units per capita over the observation period (i.e., 1.9*(–.0280)). While the overall magni-tude of this effect may appear low, the results demonstrate the high cannibalization potential of unbundling as the adoption of digital download stores progresses. Also for this variable we find the correction factor to be insignificant, indicating that intertemporal endogeneity is no reason for concern.

With respect to the economic indicators, we find support for previous findings that in-come is positively related to music sales. Our results further provide evidence for the exist-ence of a non-linear effect of income on sales, suggesting that the positive effect of income is diminishing with higher income levels, in line with our expectations. However, we find the turning point to be at a rather high income level; more precisely, we find the turning point to be at approximately 46,000 US dollars (i.e., .1476/(2*(–.0016)); Wooldridge 2002, p. 459).

Moreover, our results show that unemployment has the anticipated negative effect.

Finally, the policy indicators do not have a significant influence on music sales. This finding suggests that policy decision making cannot directly explain variations in demand over time, contrary to our expectations. However, it is possible that these variables have a positive indirect effect on sales by attenuating the negative effect of piracy on sales. We will investigate if this is the case in the next section.¹⁴

5.3. Moderating effects of country characteristics

Besides investigating the effect of Internet piracy on sales, it is the main goal of our research to identify factors that can explain the cross-country variation in this effect. Model 2 presents the results from the estimation of Equation (6), i.e., including the interaction effects.

With respect to the policy indicators our results reveal that the economic policy variable indeed shows the expected positive interaction with the broadband variable. This finding pro-vides support for our expectation that the detrimental effect of Internet piracy on sales is less severe in countries which are characterized by a high degree of IP protection and a sound business environment (via economic freedom). Thus, effective economic policies play a cen-tral role as a countermeasure against Internet piracy because they (i) reduce piracy thorough an increased level of IP protection, and (ii) promote the emergence of an efficient market for legal downloads. Although we cannot disentangle these two possible effects, we speculate that they are highly intertwined and therefore interpret the significant interaction as their net effect. Similarly, the positive interaction between the broadband variable and the policy con-tinuity variable indicates that a high degree of policy concon-tinuity reduces the effect of Internet piracy on sales.

Our findings also shed light on the largely unresolved role of globalization and Internet restrictions in the context of Internet piracy. As the significant interaction effects reveal, so-cial globalization and Internet restrictions indeed exert a significant influence on the relation-ship between piracy and music sales, in line with our expectations. More precisely, the effect is stronger in highly globalized countries, where a global consumption orientation is likely to be present and cross-national information about innovations transmits quicker. In further support of this finding, our results show that restricting international information flows miti-gates the piracy effect, as the strong positive interaction with the Internet restrictions variable reveals.

With respect to the group of covariates pertaining to the infrastructure and interpersonal communication, we find that the piracy effect is significantly stronger in urbanized environ-ments, where (cross-national) information about innovations transmits quicker and where the penetration potential is higher due to the superior infrastructure. Furthermore, we find sup-port for our expectation that the piracy effect is stronger in countries with a high female labor participation rate, i.e., countries in which the openness to change and the level of heterophilous influence is high. In contrast, mobility cannot explain the cross-country varia-tion in the effect of Internet piracy. We speculate that this finding may be due to the shifting role of interpersonal communication for the diffusion of innovations in digital environments, where face-to-face communication is likely to be less relevant. Similarly, although the coeffi-cient shows the expected sign, we do not find support for our expectation that a higher degree of collectivism is associated with a significantly stronger effect of piracy on sales.

To further shed light on the identified interaction effects, we performed simple slopes analyses, i.e., we calculate the simple slopes at one standard deviation below and above the overall mean of the moderator variable in each interaction. We visually depict the interac-tions that are significant in the full regression model in Figure 3. In addition, we report their spotlight analysis (Fitzsimons 2008) in Table 6, i.e., we shifted the overall mean level of the moderator variable up and down by one standard deviation, and then conducted significance tests for the individual slopes (Aiken and West 1991).

>>> Figure 3 about here <<<

>>> Table 6 about here <<<

As panel (a) shows, Internet piracy still negatively influences sales when the level of IP protection and economic openness is high, but to a lesser degree compared to countries in which the degree of IP protection and economic openness is low (i.e., both slopes are

signifi-for the degree of policy continuity, as depicted in panel (b). Moreover, countries which ex-hibit a high degree of social globalization are more affected by Internet piracy compared to less socially globalized countries, as seen in panel (c). In addition, panel (d) depicts the inter-action between Internet piracy and Internet restrictions. In line with our expectations, the ef-fect of Internet piracy is stronger if information flows are not restricted. Table 6 shows that the corresponding slope of the Internet piracy variable is insignificant for high levels of In-ternet restrictions and highly significant for low levels of InIn-ternet restrictions. Finally, panels (e) and (f) show that the effect of Internet piracy is reinforced with increasing levels of urban-ization and female labor participation.