Now consider what has happened in the market for illegal downloads. As the article suggests, lawsuits brought by the Recording Industry Association of America (RIAA) seem to have raised the cost most users attribute to illegal downloads.
Before these lawsuits, many users assumed there was essentially no risk that they would be prosecuted for sharing music. After the RIAA brought hundreds of high-profile lawsuits against users and settled with several users for fines in the thousands of dollars, many users apparently decided there was a cost associated with the risk of a lawsuit.
Economists can measure this kind of cost as an "expected cost." The expected cost of engaging in an illegal activity equals the cost you pay if you are caught times the probability that you will be caught. For example, suppose 10,000,000 people share music files and the RIAA randomly sues 10 of these people. If you share music files, your probability of being sued is 1 in 1,000,000. Suppose that if you are sued, you will pay a $10,000 fine. In this case, your expected cost of sharing files is $10,000 times the probability of being sued, or $10,000 times (1 divided by 1,000,000), which equals $0.01.
Now suppose that the number of RIAA lawsuits increases to 10,000. What is the new expected cost of peer-to-peer file sharing?