What we’ve discovered so far are two critical things: First, the implicit contract between the principals and the agents in the music market, far from creating the right incentives, in fact produces a moral hazard – because it doesn’t take into account problems in monitoring the record industry. Second, technology has allowed music listeners to take matter into their own hands, creating a double moral hazard.
Does understanding this help solve the record industry’s problems? Yes – in a major way. If the record labels can’t resolve the information asymmetries that let it operate under extreme moral hazard, and that cause listeners to retaliate with their own moral hazard, it should do exactly what these economics suggest: provide listeners with insurance. Of course, it would be better if the industry could resolve these information asymmetries, but I’ll leave that for another time. [more @ www.bubblegeneration.com]