ABSTRACT: Many countries limit the influence of foreign entertainment products, such as music, film, and television programs, to protect their domestic cultural industry. Commonly observed policy tools include quotas, tariffs, and subsidies. However, advances in digital technology enable consumers to access digital versions of foreign entertainment programs via the Internet, a leakage channel that bypasses government protection methods. This calls for a reexamination of the effectiveness of these traditional tools. We build a unified analytical framework to study the impact of digital technology on cultural protection policies. We find that in the presence of Internet leakage, imposing a quota is the least effective protection policy to maximize the total domestic social welfare, but using either a tariff or subsidy policy is optimal, depending on the quality difference between domestic and foreign entertainment programs via the traditional channel and the Internet. Using quotas remains the least effective policy when we extend the analyses to consider the presence of piracy. In addition to the quality difference between foreign and domestic entertainment, the proportion of unethical consumers and the cost of piracy determine whether using tariffs or subsidies is the optimal policy.
Key words and phrases: cultural protection policy , digital entertainment , quotas , subsidies , tariffs