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Robert G. Hammond

The fallacy of composition refers to an incorrect presumption that something that is true for some part of a group is necessarily true for the entire group. This chapter reviews the existing evidence on settings in which the fallacy of composition occurs and discusses a specific manifestation of the fallacy of composition: the effects of file sharing on sales in the music industry may differ between an analysis of aggregate industry sales (where file sharing has been shown to harm the music industry) and an analysis of artist-level sales (where file sharing has been shown to benefit some types of individual artists). The author then presents Monte Carlo simulations to offer new evidence from the types of econometric analysis that is often applied to data from creative industries such as the music industry. By quantifying which types of artists are expected to gain from particular technological innovations and which are expected to lose, this chapter provides insights into the prospective economic winners and losers in the evolution of the music industry.