Economic Foundations for Entertainment, Media, and Technology

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Market for Experience Goods
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Economic Foundations for Entertainment and Media

• Special Features of the Demand for Experience
  Goods

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Aspects of the Demand for Recreation

• Start from a standard microeconomic model for
  demand
• Purely internal consumption no attention to
  others
• Utility (good) f(price, other prices, income,
  preferences)
• No influences of other consumers
• Preferences are not influenced by preferences of
  others
• Utility of others is not affected by my
  consumption or my preferences

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Aspects of the Demand for Recreation

• Problems applying the standard model to
  experience goods
• Derived demands Good is an input to some other
  consumption. E.g., gasoline is an input to
  transportation.
• Social capital Consumption to obtain group
  membership
• Common interests Externalities in consumption
• Interdependent utilities Social media,
  interactive games
• Fads and herding Preferences formed by others
  opinions
• These effects are common in markets for
  experiences

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Demand for a Good or Service from the Consumers
Viewpoint
Experience Good Humdrum Good
Derived Demand SharedExperience (Bowling) (Gasoline)
Final Demand Purely Personal Experience (Book) (Hammer)
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Derived Demand A Social Capital Stock

• Art Dali, Pollock, Monet, Picasso,
  Barnett, OKeefe,
• 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,
  Wicked, 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, Olympics,
• Red Sox, NASCAR, Giants,
  Olympics,
• Gambling Full House Blackjack Point
  Spread Final Four
• TV Seinfeld, Jimmy Fallon, Jay Leno,
  Survivor, American Idol, Youre Fired,
  Olsen Twins, Real Housewives of Timbuktu, CNN,
  History Channel
• Politics Democrats and Republicans, Trump small
  hands,
• 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, Bruno Mars, Fleetwood Mac,
  Music Choice
• Gadgets iPod, iPhone, Blackberry, Guitar
  Hero, Galaxy, Tesla

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Someone Elses Capital Stock

• Art Arnold 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

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Social Capital Stock

• Art
• Opera
• Movies
• Theater
• Books
• Sports Yours?
• Gambling
• TV
• Politics
• Amusement
• Media
• Music
• Any Others?

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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
• Implication for demand A motivation for
  consumption beyond internal satisfaction(utility
  maximization).

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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.
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Wal Mart and Social Capital
Does Wal-Mart reduce social capital? Art Carden
Charles Courtemanche Jeremy MeinersPublic
Choice, 2009, 138 109136

• 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.

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Wal-Mart and Social Capital
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Bowling Alone Was About Social Capital
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. Were 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, womens roles and
other factors have contributed to this decline.
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Maintaining Your Social Capital
Social media have greatly reduced the cost of
maintenance and acquisition of social capital.
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Interdependent Demands

• Network Effects Utility of person i depends
  directly on joint consumption with other people.
• Bandwagon Effects Person is demand depends on
  the perceived demand of others

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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
• Uc(i) fc(i), income, other goods,
  c(j),c(k),
• Applications
• Telegraph, Telephone, Fax, Cellular phone
• Operating system, Word processor, etc.
• Social network Facebook, LinkedIn, Twitter,
  WhatsApp
• Implications
• Monopoly. Natural? Desirable?
• This monopoly is demand based, not supply.

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Interactive gaming
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Facebook

• The product
• Information Sharing
• Virtual Community
• Its not just for the fun of it.
• Advertising sales
• Valuation

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Implications of Network Externalities

• Early applications Utilities
• Natural monopoly
• Supply side based refining technologies for
  Standard Oil
• Modern Applications
• Operating systems, Word processor, etc.
• (Note existence of Windows emulators for Mac,
  but no MacOS emulators for Windows computers)
• Social network Facebook, LinkedIn, Twitter,
  WhatsApp
• Implications
• Rapid growth vast economies of scale
• Monopoly.
• Natural? Desirable? (The European Commission
  dislikes Google.)
• This monopoly is demand based, not supply.

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19,000,000,000 What did Facebook buy?
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Bandwagon Effects
The bandwagon effect is a psychological
phenomenon whereby people do something primarily
because other people are doing it, regardless of
their own beliefs, which they may ignore or
override. The bandwagon effect has wide
implications, but is commonly seen in politics
and consumer behavior.
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Bandwagon Effect

• Bandwagon effects Person is demand depends on
  the perceived demand of others
• d(i) f price, other prices, Income, ?jd(j)
• Amount demanded depends on the amount othershave
  purchased (or are believed to have purchased)
• Applications
• Bestsellers (books, music)
• Blockbuster movies (Star Wars)
• Electronic innovations (iPhone 6)
• This (every) years hot toy (Furby)
• Others?

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Implications of the Bandwagon 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.

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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 appear to 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)

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Excess Demand is Great for Concert Demand
? A 1998 Spice Girls concert at the Garden sold
out within minutes. ? Paul McCartneys (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. ? In the 2007 Reunion Tour A subsequent
Dec. 15 one-off show at London's O2 Arena sold
out in 38 seconds.
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Rationalizing Bandwagons by Asymmetric
InformationandChoice Strategy
Such bandwagon effects are not necessarily
irrational. Often, the buyer knows less about a
product than the seller the collective wisdom of
the crowd can correct for such asymmetric
information. It can also be a way of coping
with a surplus of choice rather than study 100
models of music player, why not assume the market
has already figured out the duds? Read the
online reviews.
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Cascades and Experience GoodsWhy are experience
goods susceptible to herding, cascades and fads?

• Cant 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?)

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Herding Behavior

• Acting suboptimally (against ones 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

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Bestsellers and BlockbustersA Theory of Herding
Behavior
Yes P gt .5
Decision
FavorablePublic Signal
Private Signal
Yes p .5 No p .5
No P lt .5
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Creating Cascades by Driving a Bestseller
And .

• 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.

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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)

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Blockbuster Movies
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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 2Spring 2003Pages 99111)

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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/23Netfl
ix-t.html?hppagewantedall (11/23/08)
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www.netflixprize.com
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Why Do We Have the Academy Awards?
http//wallethub.com/blog/economics-of-oscar-seaso
n/2124/
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Outside Information IMDb
2015 Razzie Award winner
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A Theory of Justin Timberlakes Cumulative
Advantage
When 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.
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A Theory of Cumulative Advantage
It sold well because lots of people bought it.
The Publisher
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A Theory of J. K. Rowlings Cumulative Advantage
Harry Potter by J.K.Rowling. Extremely
successful The Cuckoos Calling by Robert
Galbraith not so successful. The Cuckoos
Calling by J.K. Rowling much more successful.
Success seems not to be a function of the
intrinsic quality of the book, itself.
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A Music Experiment Demonstrates Cumulative
Advantage
Duncan Watts, Microsoft Research. 30,000
participants rate songs by bands they have never
heard of. Random assignment ? Group 1 see
only the name of the band/song ? Group 2 also
see how many times the song has been
downloaded. If only quality determines success,
the same songs should be best every time. If
bandwagon effects, success should be random
amplified by early influence. Results Success
was wildly unpredictable. Results favor the
theory of cumulative advantage. (Caveat How do
we measure quality?)