Transcript Notes for this session

Market for Experience Goods
1:E - 1(19)
More Aspects of Demand for Experience Goods
Economic Foundations for
Entertainment and Media
Special Features of the Demand
for Experience Goods
1:E - 2(19)
More Aspects of Demand for Experience Goods
Winner Take All Markets
The Winner-Take-All Society, Frank, R., Cook, P., Penguin, 1995.
“The entire planet can
get along nicely now
with maybe a dozen
champion performers
in each area of human
giftedness.” (Kurt
Vonnegut, Bluebeard,
1987.)
Sherwin Rosen, “The Economics of
Superstars,” AER, 1981.
1:E - 3(19)
More Aspects of Demand for Experience Goods
A Winner Take All Market
Of the top 50 best sellers of all types in
1990-1998, 43 were novels and 41 of them
were by John Grisham, Stephen King,
Danielle Steel, Michael Crichton, Tom
Clancy, and Mary Higgins Clark. Together,
they sold just under 200,000,000 books.
Any others?
James Patterson: 20,000,000
J.K.Rowling 400,000,000+
Danielle Steel 800,000,000+
1:E - 4(19)
More Aspects of Demand for Experience Goods
Winner Take All Markets
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A characteristic of winner take all markets:
Barely perceptible quality difference spells
the difference between success and failure.
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1:E - 5(19)
(Early) Tiger Woods
The one stroke difference between #1 and #40 in golf
Opera – Pavarotti(?)
The iPod
Google?
YouTube?
Others?
More Aspects of Demand for Experience Goods
Elements of Winner Take All Markets
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1:E - 6(19)
Network externalities (books), cascades
and “tipping” in markets
First mover/success (Windows plug-ins, AOL
Instant Messenger, iPod, Google? Facebook)
Production cloning and economies of scale
Risk avoidance by consumers
Consumers’ desire to accumulate common
social capital
More Aspects of Demand for Experience Goods
Winner Take All Markets: Bigger Markets;
Winners have larger shares
1:E - 7(19)
More Aspects of Demand for Experience Goods
A Theory of Winner Take All:
Rosen on Superstars
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Empirical regularity: extremely skewed
distribution of income in talent based industries
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Small differences in quality translate to large
skewness in the distributions of success
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Underlying conditions of demand and supply
combine to produce this result.
1:E - 8(19)
More Aspects of Demand for Experience Goods
Alan Krueger: “Rockonomics”
1:E - 9(19)
More Aspects of Demand for Experience Goods
Winners Take All In 2002?
1:E - 10(19)
More Aspects of Demand for Experience Goods
Winners Still Taking All In 2008
1:E - 11(19)
More Aspects of Demand for Experience Goods
And In 2011
1:E - 12(19)
More Aspects of Demand for Experience Goods
Total 2013 touring
revenues for the top
25 earners: $2,155M.
The entire market,
about $2.5B - $3.0B
Total Royalties: more.
1:E - 13(19)
More Aspects of Demand for Experience Goods
Is it a price effect or quantity effect? Mainly quantity.
(2013) Ticket price is not related to the popularity of the act.
Tickets (M)
1:E - 14(19)
(2008) Ticket price is somewhat related to the
scale of the event..
More Aspects of Demand for Experience Goods
Changing Demographic Effects
Sales of concert tickets, a vital measurement of the health of the music industry, returned to their former strength
in 2012 after two slow years, with Madonna and Bruce Springsteen leading the most popular tours. The results,
however, point to two trends that have long worried critics of the business: rising prices and the predominance of
aging superstars whose fans care little about their new material.
The top 100 tours in North America had $2.5 billion in gross ticket sales last year, nearly equal to their peak
three years ago, according to Pollstar, a trade publication. Madonna was the biggest attraction, with $134 million
in sales, followed by Cirque du Soleil’s tribute to Michael Jackson, “The Immortal,” which had $113 million; Mr.
Springsteen was No. 3 with $105 million. Madonna also topped Pollstar’s worldwide chart, with $296 million in
gross sales, followed by Mr. Springsteen with $210 million. These numbers are welcome for the concert
business, which faltered in 2010 after more than a decade of swift growth, for reasons variously attributed to the
recession, weak lineups and overpriced tickets. It had only a slight rebound in 2011.
Yet fewer tickets were being sold at higher prices. Fans bought 36.7 million tickets for the Top 100 tours in
North America last year, still down from 40.5 million in 2009. Last year, the cost of an average ticket rose to a
record $68.76. The Rolling Stones’ handful of 50th anniversary shows was the most expensive, at an average of
$519. And while fans flocked to see Madonna and Mr. Springsteen in concert, they largely avoided their new
albums. Madonna’s “MDNA,” released last year, sold 527,000 copies, according to Nielsen SoundScan; as many
as a third of those were given away with the purchase of a ticket, according to estimates. Mr. Springsteen’s
“Wrecking Ball,” also released last year, sold 490,000 copies.
1:E - 15(19)
More Aspects of Demand for Experience Goods
A Rational Addiction Theory
 Rational addiction – a dynamic model of consumption
Consumption might be for learning purposes.
E.g., I will go to several operas to learn how to enjoy
opera.
Acquired taste such as opera,
renaissance art, hip hop music
 Accumulated expertise – a capital stock
 This implies a decreasing demand
elasticity as accumulated consumption
increases (an ‘addiction’ develops).
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1:E - 16(19)
More Aspects of Demand for Experience Goods
A Rational Addiction Theory
Utility(i,t) = U[c(i,t),s(i,t),y(i,t)] for consumer i in period t
c(i,t) = consumption of the addictive good
y(i,t) = consumption of other (nonaddictive) goods
s(i,t) = a capital stock related to consumption of c (e.g., knowledge)
Utility increases as s(i, t) increases. (Marginal utility of knowledge.)
1:E - 17(19)
More Aspects of Demand for Experience Goods
Implication of Rational Addiction
Utility increases as s(i, t) increases. (Marginal utility of knowledge.)
Implications for the desired consumption:
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1) c(i,t) = f Price,Income, s=... c(i,s)
t-1
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The amount demanded depends on the amount consumed previously.
2) Price elasticity tends to decrease as marginal utility increases
1:E - 18(19)
More Aspects of Demand for Experience Goods
Implications of Rational Addiction Theory:
This applies to certain kinds of experiences.
1:E - 19(19)
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Investment in promotion increases
demand directly – part of the capital
stock is awareness of the good.
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Increased demand becomes reduced
elasticity – greater profitability beyond
increased demand.
More Aspects of Demand for Experience Goods