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Music for free?
A transaction cost analysis approach to P2P networks

Millions of people use online peer to peer (P2P) networks to download music files, for free, no payments involved. However, downloading a music file is often not quite so easy, as many problems may occur. The apparent free downloading of music files through a P2P network actually involves high transaction costs for the users.

We analyze P2P networks through the lens of transaction cost economics, as this theory attempts to explain why some transactions are directed in the context of a hierarchy, as opposed to taking place in an open market. We assume that a P2P network resembles the characteristics of an open market rather than that of a hierarchy. However, it can not be considered as a perfect market. The transaction costs are in fact departures from this perfection. In order to analyze these imperfections, we present an extended organizational failures framework, based on both transaction cost economics (TCE) and information economics.

Although P2P can be defined as a pure decentralized organizational form, different types can be identified with different architectures. We discuss the principles of these types in order to analyze the extent of hierarchy. We apply our extended organizational failures framework in order to find a theoretical explanation for the transaction costs that occur in P2P file transfers by identifying the determinants. Two major theoretical problem areas can cause transaction costs, which are polluted content and free riding.

In order to test whether these problems occur in P2P networks in practice and to identify mechanisms that prevent the defined problems and thus lower transaction costs, we present criteria that are used for an experiment in which we analyze three popular P2P networks. In this experiment, we download six different music files (three popular and three all-time favourites) with three different P2P application and present our findings in terms of experienced problems in the search and download process.

By conducting this experiment, valuable information is gained that offers more insight into the existence of theoretically defined problems in real-world P2P networks. Finally, we propose recommendations for future P2P application development by combining the identified transaction cost lowering mechanisms and theoretically analyzed determinants of the problems. We hope to contribute to the challenge of making P2P networks more economically efficient.

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