Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Professor William Greene

2. Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods

3. Understanding the Demand for Experience Goods • Differences between experience and “humdrum” goods • Motivation for consumption • Aspects of demand • Implications for markets

4. Experience Goods vs. Utility Goods The classical theory of demand falls short when applied to markets for experience goods.

5. Demand for a Good or Service from the Consumer’s Viewpoint

6. Consumption of Experience Goods • Experience vs. Utilitarian Consumption • Experience Goods - Motivation • Purely internal • Immediate utility (satisfaction) • Rational addiction • Interactive and interdependent • Common interests - discourse • Accumulation of social capital

7. A Rational Addiction Theory • Acquired taste (opera, renaissance art, rap music) • Accumulated expertise – a capital stock • This implies a decreasing demand elasticity as accumulated consumption increases (an addiction).

8. Rational Addiction Theory

9. Implications of Rational Addiction Theory • Investment in promotion increases demand directly – part of the capital stock is awareness of the good. • Increased demand becomes reduced elasticity – greater profitability beyond increased demand.

10. Economic Foundations for Entertainment and Media The Demand for Experience Goods is Strongly Influenced by Interactions of Preferences and Consumption

11. Social Capital Stock ArtDali, Pollock, Monet, Picasso, Barnett, O’Keefe, Warhol, Haring, Wyeth, Rembrandt, Klimt Opera Pavarotti, Carmen, Tommy, Aida, Soap Movies Gone with the Wind, Casino Royale, Kill Bill, Brave One, KONY2012 Theater Lion King, TONY, Rent, Blue Man Group, Hairspray Books E. Leonard, J. Collins, W. Greene, S.Hawking, H. Clinton, Sarah Palin, Dan Brown, T. Clancy, J. Grisham, T. Wolfe, J. Michener, Ann Coulter Sports Yankees, Rugby, T. Woods, Super Bowl, Replay Camera, Agassi, Lebron James, Hat trick, A-Rod, March Madness Red Sox, NASCAR, Giants, Olympics, Gambling Full House Blackjack Point Spread Final Four TV Seinfeld, Jay Leno, Survivor, American Idol, You’re Fired, Olsen Twins, CNN, History Channel Politics (You name it) Amusement Sky Diving Roller coaster Bungee jump Media Time, Slate, People, Scientific American, The Economist, NYT, YouTube Music Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem, VMA, Dire Straits, Billy Joel, Bonnie Raitt, Fleetwood Mac, Music Choice Gadgets iPod, iPhone, Blackberry, Guitar Hero

12. Someone Else’s Capital Stock ArtArnold Böcklin Opera - Movies The Truman Show, Tinklebell, Pulp Fiction, The Matrix Theater - Books Max Dendermonde, Simon Vestdijk, Gabriel García Márquez Sports - Gambling - TV Martin Morning, Sesame Street, Mega Mindy, Kim Possible, The Five, Phineas and Ferb Politics - Amusement Family games Media NRC, Le Monde, Nice Matin, Dagens Industry, Wikipedia, Reuters Music XFM, SlamFM, NonStopPlay.com, Radio4.nl, BBC World Service, France Inter, DJ Tiesto, Yelle, Eminem, Queen, Michael Jackson, Lionel Richie, ABC, Robbie Williams

13. Social Capital Stock Art Opera Movies Theater Books SportsYours? Gambling TV Politics Amusement Media Music Any Others?

14. The Social Capital Stock • Functions it serves in the community • Aspects – It is similar to other capital stocks • Maintenance • Depreciation • Investment • Implications for demand: A motivation for consumption beyond internal satisfaction.

15. TIVO Capital TiVo has made me realize that “pulling the plug” rather than recording shows separates the TV boycotter from the rest of society. My TiVo allows me to contribute to conversations revolving around TV rather than silently observing them.

16. Wal Mart and Social Capital Public Choice (2009) 138: 109–136 Does Wal-Mart reduce social capital? Art Carden · Charles Courtemanche · Jeremy Meiners • Increase consumption of “humdrum goods” with less external connectedness • Reduce connection to the community by lowering viability of small “local” businesses • (Unfortunately, the empirical data did not support the hypothesis.)

17. Putnam warns that our stock of social capital– the very fabric of our connections with each other, has plummeted, impoverishing our lives and communities. Putnam draws on evidence including nearly 500,000 interviews over the last quarter century to show that we sign fewer petitions, belong to fewer organizations that meet, know our neighbors less, meet with friends less frequently, and even socialize with our families less often. We’re even bowling alone. More Americans are bowling than ever before, but they are not bowling in leagues. Putnam shows how changes in work, family structure, age, suburban life, television, computers, women’s roles and other factors have contributed to this decline.

18. Maintaining Your Social Capital Have greatly reduced the cost of maintenance and acquisition of social capital.

19. Interdependent Demands • Bandwagon effects • d(i) = f [price, other prices, Income, d(j)] • Amount demanded depends on the amount others have purchased (or are believed to have purchased) • Applications • Bestsellers (books, music, movies) • Movies • Electronic innovations • This year’s hot toy • Others?

20. Implications of the Theory Elasticity of demand increases as sales increase (1) Demand shifts outward as buyers see aggregate sales rise. (It shifts outward because it shifts outward. (2) Lowering the price brings larger benefits (in terms of increased sales) than it would otherwise. (3) Advertising to increase demand is likely to be more effective than it would be otherwise. The success of advertisting is leveraged.

21. Extreme Case: Concerts • i d(i) = i d(i)[price, other prices, Income,D] D = total demanded (observed by the consumer) • Total demand depends on observed total demand • Effect can produce positive relation between price and quantity. (Note, not a “demand curve.”) • For the concert, MC = 0 (or close to it) • End result: Profit = revenue maximization may occur with excess demand (fans outside the facility)

22. Excess Demand Paul McCartney’s (April, 2002) concert in Madison Square Garden was sold out within two hours of the opening of the box office. A representative of the Garden was asked what the effect of doubling the $50 - $150 ticket price would be. Her reply: “It probably would have taken three hours to sell out.” A 1998 Spice Girls concert at the Garden sold out within minutes.(http://www.eonline.com/News/Items/0,1,3245,00.html) In the 2007 Reunion Tour: A subsequent Dec. 15 one-off show at London's O2 Arena sold out in 38 seconds. (http://www.livedaily.com/news/13609.html)

23. Excess Demand for U2

24. Network Externalities • Utility from use of a good by a person depends on the total number of people using the good. • c(i) = consumption of the good or service • U[c(i)] = f[c(i), income, other goods, c(j),c(k),…] • Applications: • Telegraph, Telephone, Fax,Cellular phone • Operating system, word processor, etc. • Social network – Facebook, LinkedIn, Twitter • Implications: • Monopoly. Natural? Desirable? • Quepasa.com (is now meetme.com) • This monopoly is demand based, not supply.

27. Fastest Growing and Largest Website on the Planet Until 2007 What happened to Myspace? (1600 employees in 2008, 200 in 2011)

28. 150,000,000 members (… 160, … 170,…500…900)

29. Facebook • The product • Information Sharing • Virtual Community • It’s not just for the fun of it. • Advertising sales • Valuation

30. Herding Behavior • Herding behavior: Acting suboptimally (against one’s best interest) in response to external information. (Lemmings) • Information Cascades • Should I read the book, see the movie, buy the product, … • Consumers assemble 2 kinds of information to make the decision: • Private signals: Their own information and opinions • Public signals: Aggregate information that everyone has. • Undecided consumers can be pushed over to yes or no by the same public signal that everyone has

31. Bestsellers and BlockbustersTheory of Herding Behavior Yes: P > .5 Decision FavorablePublic Signal Private Signal Yes: p = .5 No: p = .5 No: P < .5

32. Inference from Cascades Model • Cascades occur as individuals substitute others’ actions for their own private information • Outside information comes from certifiers (critics, film buffs) • Cascades should occur most of the time.

33. Outside Information IMDb

34. Connecting Consumers:Cinematch PERSONALIZED MOVIE RECOMMENDOR PROVIDES NETFLIX VISITORS WITH HIGHLY ACCURATE FILM RECOMMENDATIONS BASED ON THEIR INDIVIDUAL MOVIE TASTE HISTORY http://www.nytimes.com/2008/11/23/magazine/23Netflix-t.html?hp=&pagewanted=all (11/23/08)

35. Blockbuster Movies

36. A Theory of Cumulative Advantage “It sold well because lots of people bought it.” The Publisher

37. A Theory of Justin Timberlake’s Cumulative Advantage Duncan Watts study in NYT. (4/15/07) [W]hen people tend to like what other people like, differences in popularity are subject to what is called “cumulative advantage,” or the “rich get richer” effect. This means that if one object happens to be slightly more popular than another at just the right point, it will tend to become more popular still. As a result, even tiny, random fluctuations can blow up, generating potentially enormous long-run differences among even indistinguishable competitors — a phenomenon that is similar in some ways to the famous “butterfly effect” from chaos theory. Thus, if history were to be somehow rerun many times, seemingly identical universes with the same set of competitors and the same overall market tastes would quickly generate different winners: Madonna would have been popular in this world, but in some other version of history, she would be a nobody, and someone we have never heard of would be in her place.

38. No Longer a Fad

39. Cascades and Experience GoodsWhy are experience goods susceptible to herding, cascades and fads? • Can’t assess quality without consuming • Limited value of advertising • Inherent uncertainty in consumption • Social capital aspect of consumption • Network effects • Membership and social standing • Sources of outside information – critics and certifiers • Riskiness of critical information – endogeneity of reviews • What role do prizes play? (Oscars, MTV Video Awards?)

40. Creating Cascades • The Discipline of Market Leaders (1995). The authors secretly purchased 50,000 copies from bookstores whose sales drive the New York Times best seller list. And ….

41. The Roles that Critics and Experts Play • Critical acclaim • Academy Awards, All time best list, “100 Must See Films of the 20th Century” • Booker Prize in publishing • Music competitions • Rewards = f(acclaim) • Or, acclaim = f(rewards) • Why do we have the academy awards? • (“Awards, Success and Aesthetic Quality in the Arts: Ginsberg, JEP) Smart Money Magazine: March 8, 2010http://www.smartmoney.com/investing/stocks/The-Oscars-A-Corporate-Scorecard/?print=1

42. “The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness.” (Kurt Vonnegut, Bluebeard, 1987.) Winner Take All Markets The Winner-Take-All Society, Frank, R., Cook, P., Penguin, 1995. Sherwin Rosen, “The Economics of Superstars,” AER, 1981.

43. 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+

44. Winner Take All Markets • A characteristic of winner take all markets: Barely perceptible quality difference spells the difference between success and failure. • (Early) Tiger Woods • The one stroke difference between #1 and #40 in golf • Opera – Pavarotti(?) • The iPod • Google? • YouTube? • Others?

45. Elements of Winner Take All Markets • Network externalities (books), cascades and “tipping” in markets • First mover/success (Windows plug-ins, AOL Instant Messenger, iPod, Google?) • Production cloning and economies of scale • Risk avoidance by consumers • Consumers’ desire to accumulate common social capital

46. A Theory of Winner Take All: Rosen on Superstars • Empirical regularity: extremely skewed distribution of income in talent based industries • Small differences in quality translate to large skewness in the distributions of success • Underlying conditions of demand and supply combine to produce this result.

48. Winners Take All?

50. Price effect or quantity effect? Mainly quantity.