On this point, i disagree. I believe there is a more significant relationionship between the two as complimentary goods. Consumers have a limited budget to spend on paid songs that they like, the utility of which is increased by sampling illegal music to better identify what music they prefer.

People are reluctant to buy things if they don’t yet know whether they like it or not. Once they know that they like a song (or find one that they like which they would not otherwise have discovered) and predict that they will listen to it numerous times, most people (from my personal observations) buy the paid version. They do this for various reasons – social and moral pressure, convenience, legitimacy value, fashion.

So if illegal music becomes more expensive, people discover less music that appeals to them and are less certain about what they do know, so the utility of paid music for them declines, so demand for paid music DECREASES.

Paid music – illegal music: complimentary goods
Paid music – live performance: complimentary goods
illegal music – live performance: complimentary goods

Paid music – radio/music channels: substitutes.
(listeners sacrifice choosing the music they want to hear, convenience, fashion for price, without social/moral/legitimacy consequences)

I’m intrigued by your decision to use the word “free” to mean the opposite of both gratis and libre.

So one important part of any law is the penalty for misuse. The takedown system right now as no penalty in practice, so it’s widely abused. Until someone (preferably a major label) gets soundly smacked for false claims they have every incentive to keep making them.

The way regulations are being implemented does seem rather strange though, I agree. Having said that, I’m not sure how one would go about enforcing IP rights without being awfully heavy handed about it.

It’ll be at least as interesting to see how the new laws do on natural justice. We’re hearing more cases now of people falsely accused of infringement (and the proposed process is built on guilt on accusation) as well as accusations against music distributers (both for infringement, like Lily Allen’s unlicensed (viz, pirate or illegal) mix tapes being hosted by her record company; and for theft – claiming copyright for material they have no rights to). The widespread abuse of takedown notices on youtube and myspace makes me think it’ll be another farce in the same sense, but with nasty legal consequences.

I think it will mostly be a PR effort – the old music industry enhancing its reputation for being a wunch of bankers.