The Economics of Copyright Levies on Hardware

We provide an economic analysis of the static and dynamic effects of copyright levies on hardware. Contrary to copyright levies on supports such as tapes, CDs or DVDs, whose main use is to copy, levies on hardware do not modify the propensity of consumers to use 'illegal' content. They decrease both levels of 'legal' and 'shared' contents, leading to a decrease in the revenues from legal sales for copyright holders. The levies could compensate for the decrease but this would require copyright holders to receive a large share of the levies. Hence from a static perspective, levies on hardware are likely to fail achieving their goal of increasing the financial flow to copyright holders. We also consider a dynamic version of the model where artists are differentiated by reputation and where reputation and sales covary (more reputation leads to higher sales and higher sales to more reputation). Then, even if high reputation artists benefit from higher levies, lower reputation artists are hurt. Finally, we show that when content providers have market power and can choose between offering content at a unit price or through a subscription service, incentives to implement subscription models are decreasing in the level of levies on hardware, despite the fact that subscription services may eliminate piracy.