MEASURING THE EFFECT OF NAPSTER ON RECORDED MUSIC SALES: DIFFERENCE‐IN‐DIFFERENCES ESTIMATES UNDER COMPOSITIONAL CHANGES

SUMMARY This paper measures the effect of Napster on record sales. I treat the introduction of Napster as a technological event that only Internet users experienced, and use a difference‐in‐differences (DD) approach. Because of potential compositional changes in Internet users, I examine identifying assumptions for the DD estimator under compositional changes and develop a test for identifying restrictions. To address potential bias due to compositional changes, I extend DD matching estimators to the case of two‐variate propensity scores. I find evidence suggesting that file sharing is likely to explain 20% of total sales decline, which is driven by households with children aged 6–17. Copyright © 2011 John Wiley & Sons, Ltd.