Demand for Experience Goods1:2 - 1(59)

Entertainment and Media: Markets and Economics

Professor William Greene

Demand for Experience Goods1:2 - 2(59)

Economic Foundations for Entertainment and Media

Special Features of the Demand for Experience

Goods

Demand for Experience Goods1:2 - 3(59)

Understanding the Demand for Experience Goods

Differences between experience and “humdrum” goods

Motivation for consumption Aspects of demand Implications for markets

Demand for Experience Goods1:2 - 4(59)

Experience Goods vs. Utility Goods

The classical theory of demand falls short when applied to markets for experience goods.

Demand for Experience Goods1:2 - 5(59)

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

Experience Good

Utility Good

Derived Demand

SharedExperience

Gasoline

Final Demand

Purely Personal, Internal

Shoes

Demand for Experience Goods1:2 - 6(59)

Consumption of Experience Goods

Commodities Consumption: Utilitarian Experience Goods - Motivation

Purely internal Immediate utility (satisfaction) Rational addiction

Interactive and interdependent Common interests - discourse Accumulation of social capital

Demand for Experience Goods1:2 - 7(59)

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).

Demand for Experience Goods1:2 - 8(59)

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

Demand for Experience Goods1:2 - 9(59)

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.

Demand for Experience Goods1:2 - 10(59)

Economic Foundations for Entertainment and Media

The Demand for Experience Goods is

Strongly Influenced by Interactions of Preferences

and Consumption

Demand for Experience Goods1:2 - 11(59)

A Social Capital StockArt Dali, Pollock, Monet, Picasso, Barnett, O’Keefe, Warhol, Haring, Wyeth, Rembrandt, Klimt Opera Pavarotti, Carmen, Tommy, Aida, SoapMovies Gone with the Wind, Casino Royale, Kill Bill, Brave One, KONY2012Theater Lion King, TONY, Rent, Blue Man Group, Wicked, HairsprayBooks E. Leonard, J. Collins, W. Greene, S.Hawking, H. Clinton, Sarah Palin,

Dan Brown, T. Clancy, J. Grisham, T. Wolfe, J. Michener, Ann CoulterSports Yankees, Rugby, T. Woods, Super Bowl, Replay Camera,

Agassi, Lebron James, Hat trick, A-Rod, March Madness, Olympics, Red Sox, NASCAR, Giants, Olympics,Gambling Full House Blackjack Point Spread Final FourTV Seinfeld, Jimmy Fallon, Jay Leno, Survivor, American Idol, You’re

Fired, Olsen Twins, Real Housewives of Timbuktu, CNN, History Channel

Politics (You name it)Amusement Sky diving Roller coaster Bungee jumpMedia Time, Slate, People, Scientific American, The Economist, NYT, YouTubeMusic Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem,

VMA, Dire Straits, Billy Joel, Bruno Mars, Fleetwood Mac, Music ChoiceGadgets iPod, iPhone, Blackberry, Guitar Hero, Galaxy, Tesla

Demand for Experience Goods1:2 - 12(59)

Someone Else’s Capital StockArt Arnold BöcklinOpera -Movies The Truman Show, Tinklebell, Pulp Fiction, The MatrixTheater -Books Max Dendermonde, Simon Vestdijk, Gabriel García Márquez Sports -Gambling -TV Martin Morning, Sesame Street, Mega Mindy, Kim Possible,

The Five, Phineas and FerbPolitics -Amusement Family gamesMedia NRC, Le Monde, Nice Matin, Dagens Industry, Wikipedia, ReutersMusic XFM, SlamFM, NonStopPlay.com, Radio4.nl, BBC World Service,

France Inter, DJ Tiesto, Yelle, Eminem, Queen, Michael Jackson,Lionel Richie, ABC, Robbie Williams

Demand for Experience Goods1:2 - 13(59)

Social Capital StockArt Opera Movies Theater Books

Sports Yours?Gambling TVPolitics Amusement Media MusicAny Others?

Demand for Experience Goods1:2 - 14(59)

The Social Capital Stock

Functions it serves in the community Aspects – It is similar to other capital stocks

It requires maintenance It depreciates over time Investment is required to maintain and grow it

Implications for demand: A motivation for consumption beyond internal satisfaction.

Demand for Experience Goods1:2 - 15(59)

Others are aware of this: TIVO CapitalTiVo 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.

Demand for Experience Goods1:2 - 16(59)

Wal Mart and Social Capital

Increases 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.) Difficult to devise a persuasive empirical test The test they devised did not support the claim.

Does Wal-Mart reduce social capital?Art Carden · Charles Courtemanche · Jeremy MeinersPublic Choice (2009) 138: 109–136

Demand for Experience Goods1:2 - 17(59)

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.

Bowling Alone Was About Social Capital

Demand for Experience Goods1:2 - 18(59)

Maintaining Your Social Capital Social media have greatly reduced the cost of maintenance and acquisition of social capital.

Demand for Experience Goods1:2 - 19(59)

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?

Demand for Experience Goods1:2 - 20(59)

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.

Demand for Experience Goods1:2 - 21(59)

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)

Demand for Experience Goods1:2 - 22(59)

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.

In the 2007 Reunion Tour: A subsequent Dec. 15 one-off show at London's O2 Arena sold out in 38 seconds.

Demand for Experience Goods1:2 - 23(59)

Excess Demand for U2

Demand for Experience Goods1:2 - 24(59)

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.

Demand for Experience Goods1:2 - 25(59)

Demand for Experience Goods1:2 - 26(59)

Demand for Experience Goods1:2 - 27(59)

Fastest Growing and Largest Website on the Planet Until 2007

What happened to Myspace? (1600 employees in 2008, 200 in 2011)

Demand for Experience Goods1:2 - 28(59)

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

Demand for Experience Goods1:2 - 29(59)

Facebook

The product Information Sharing Virtual Community

It’s not just for the fun of it. Advertising sales Valuation

Demand for Experience Goods1:2 - 30(59)

(Changing Face of Facebook)

2014

2012

Demand for Experience Goods1:2 - 31(59)

Demand for Experience Goods1:2 - 32(59)

$19,000,000,000

Demand for Experience Goods1:2 - 33(59)

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

Demand for Experience Goods1:2 - 34(59)

Bestsellers and BlockbustersTheory of Herding Behavior

FavorablePublic Signal

Private Signal

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

Decision

No: P < .5

Yes: P > .5

Demand for Experience Goods1:2 - 35(59)

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.

Demand for Experience Goods1:2 - 36(59)

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 ….

Demand for Experience Goods1:2 - 37(59)

Outside Information: IMDb

Demand for Experience Goods1:2 - 38(59)

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)

Demand for Experience Goods1:2 - 39(59)

Blockbuster Movies

Demand for Experience Goods1:2 - 40(59)

A Theory of Cumulative Advantage

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

The Publisher

Demand for Experience Goods1:2 - 41(59)

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.

Demand for Experience Goods1:2 - 42(59)

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

Demand for Experience Goods1:2 - 43(59)

A Music Experiment

Demonstrates Cumulative Advantage

Demand for Experience Goods1:2 - 44(59)

First Mover, No Longer a Fad

Demand for Experience Goods1:2 - 45(59)

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)

Demand for Experience Goods1:2 - 46(59)

Why Do We Have the Academy Awards?

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

Demand for Experience Goods1:2 - 47(59)

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?)

Demand for Experience Goods1:2 - 48(59)

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.

Demand for Experience Goods1:2 - 49(59)

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+

Demand for Experience Goods1:2 - 50(59)

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?

Demand for Experience Goods1:2 - 51(59)

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

Demand for Experience Goods1:2 - 52(59)

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.

Demand for Experience Goods1:2 - 53(59)

Alan Krueger: “Rockonomics”

Demand for Experience Goods1:2 - 54(59)

Winners Take All In 2002?

Demand for Experience Goods1:2 - 55(59)

Winners Still Take All In 2008

Demand for Experience Goods1:2 - 56(59)

And In 2011

Demand for Experience Goods1:2 - 57(59)

Price effect or quantity effect? Mainly quantity.

Demand for Experience Goods1:2 - 58(59)

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

Demand for Experience Goods1:2 - 59(59)

How does demand for experience goods differ from demands for

humdrum goods?

End Class 1 – Part 2