Does a free download equal a lost sale?

Record industry executives hold it as an article of faith that the advent of file-sharing Web sites like Napster and Kazaa was largely responsible for a stunning decline in the sales of recorded music. From 1999 to 2003, after all, the number of compact discs and other forms of recorded music shipped in the United States plunged 31 percent.

Sure, other factors--including the stubbornly high price of CDs, a recession that cut into discretionary spending, a plethora of unappealing pop acts and the intense competition for the entertainment dollar--may have contributed. "But there's no question that file sharing has an enormous impact on sales," said Mitch Bainwol, chairman and chief executive of the Recording Industry Association of America, based in Washington. "The most basic notion of economics is this notion of perfect substitution. You have two products that are in essence substitutes, so the market drives toward the freebies."

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