More Aspects of Demand for Experience Goods 1:E - 1(31) Market for Experience Goods.

More Aspects of Demand for Experience Goods1:E - 1(31)

Market for Experience Goods


Economic Foundations for Entertainment and Media

Special Features of the Demand for Experience

Goods


Herding Behavior

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

Herding behavior: Acting suboptimally (against one’s best interest) in response to external information. (Lemmings)

Information Cascades


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 ….


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 – upward bias of reviews What role do prizes play? (Oscars, MTV Video Awards?)


Inference from Cascades Model

Cascades occur as individuals substitute others’ actions for their own private information

Outside information comes from certifiers (critics, film buffs, awards)

Cascades should occur most of the time.


Bestsellers and BlockbustersTheory of Herding Behavior

FavorablePublic Signal

Private Signal

Yes: p = .5 No: p = .5

Decision

No: P < .5

Yes: P > .5


Blockbuster Movies


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) (“Awards, Success and Aesthetic Quality in the Arts:

Ginsberg, Journal of Economic Perspectives Volume 17, Number 2—Spring 2003—Pages 99–111)


Connecting Consumers: CinematchPERSONALIZED 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)


Why Do We Have the Academy Awards?

http://wallethub.com/blog/economics-of-oscar-season/2124/


Outside Information: IMDb


A Theory of Cumulative Advantage

“It sold well because lots of people bought it.”

The Publisher


A Theory of Justin Timberlake’s Cumulative Advantage

[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.


Harry Potter by J.K.Rowling

The Cuckoo’s Calling by Robert Galbraith – not so successful.

The Cuckoo’s Calling by J.K. Rowling – much more successful.

A Theory of J. K. Rowling’s Cumulative Advantage


A Music Experiment

Demonstrates Cumulative Advantage


Winner Take All Markets

“The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness.” (Kurt Vonnegut, Bluebeard, 1987.)

The Winner-Take-All Society, Frank, R., Cook, P., Penguin, 1995.

Sherwin Rosen, “The Economics of Superstars,” AER, 1981.


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+


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?


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? Facebook)

Production cloning and economies of scale Risk avoidance by consumers Consumers’ desire to accumulate common

social capital


Winner Take All Markets: Bigger Markets; Winners have larger shares


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.


Alan Krueger: “Rockonomics”


Winners Take All In 2002?


Winners Still Take All In 2008


And In 2011


Price effect or quantity effect? Mainly quantity.


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.

Changing Demographic Effects


A Rational Addiction Theory

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).


A Rational Addiction TheoryUtility(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 consump

t-1

s=...

tion of c (e.g., knowledge)

Implications for the desired consumption:

1) c(i,t) = f Price,Income, c(i,s)

The amount demande

Utility increases as s(i, t) increases. (Marginal utility of knowledge.)

d depends on the amount consumed previously.

2) Price elasticity tends to decrease as marginal utility increases


Implications of Rational Addiction Theory:This applies to certain kinds of experiences.

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.

More Aspects of Demand for Experience Goods 1:E - 1(31) Market for Experience Goods.

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