How the Music Industry Shields Itself from Market Forces

Umair Haque: The New Economics of Music: File-Sharing and Double Moral Hazard

"Moral hazard happens when the actions of an agent can be hidden from a principal, creating agency costs – because the agent is able to shirk, take additional risks, and generally not deliver on his end of the bargain. In this case, the moral hazard is that the record industry, because listeners can’t monitor or influence it, can effectively shirk, and choose artists not based on listeners’ preferences, but based on business efficiencies. This is effectively what the record industry has been doing – adding massive agency costs that replace the search value it is supposed to provide."

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