Behavioral Economic insights into Today's Digital Music Market

In this paper, I present a model of an “appeal exaggeration” bias, which I use to explain some effects that are observed in today’s digital music market, such as the fact that Apple Music is not gaining subscribers at the expected rate, the fact that streaming providers negotiate with record labels to push for a price drop, and the fact that Spotify, who offer a free streaming option, are continuing to do well despite the competition. The model I use suggests that regular listeners overestimate the utility of the songs they are familiar with, while greatly underestimating millions of other tracks, which leads them not to buy the paid streaming’s bargain, while more experienced listeners care less about the more popular records, which makes them less likely to switch providers. Additionally, my findings suggest that Spotify’s strategy of offering free ad-supported streaming may indeed be very effective in making more paying customers.