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Entertainment and Media: Markets and Economics. Professor William Greene. 1/47. Economic Foundations for Entertainment, Media, and Technology. Special Features of the Demand for Experience Goods. 2/47. Understanding the Demand for Experience Goods.

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Entertainment and Media: Markets and Economics

Professor William Greene

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Economic Foundations for Entertainment, Media, and Technology

Special Features of the Demand for Experience Goods

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Understanding the Demand for Experience Goods

  • Differences between experience and “humdrum” goods

  • Motivation for consumption

  • Aspects of demand

  • Implications for markets

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

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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

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Experience Goods vs. Utility Goods

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

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Rational Addiction

  • Acquired taste (opera, renaissance art, rap music)

  • Accumulated expertise – a capital stock

  • This implies a decreasing demand elasticity (an addiction).

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Economic Foundations for Entertainment, Media, and Technology

The Demand for Experience Goods is Strongly Influenced by Interactions of Preferences and Consumption

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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

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

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

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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

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Social Capital Stock












Any Others?

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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.

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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

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, empirical data do not support the hypothesis.)

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Interdependent Demands

  • Bandwagon effect

  • d(i) = f [price, other prices, Income, d(j)]

  • Amount demanded depends on the amount others (are

    known to) have purchased

  • Applications

    • Bestsellers (books, music, movies)

    • Movies

    • Electronic innovations

    • This year’s hot toy

    • Others?

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Elasticity of demand increases as sales increase

Demand shifts outward as buyers see aggregate sales rise.

Implication 1: Lowering the price brings large benefits.

Implication 2: Advertising to increase demand is likely to be very effective.

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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 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

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)

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Excess Demand for U2

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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.

  • Applications:

    • Telegraph

    • Telephone

    • Fax

    • Cellular phone

    • Operating system, word processor, etc.

  • Implications: Monopoly? Natural? Desirable?

  • This monopoly is demand based, not supply.

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Fastest Growing and Largest Website on the Planet Until 2007

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150,000,000 members (… 160, … 170,…)

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  • The product

    • Information Sharing

    • Virtual Community

  • It’s not just for the fun of it.

    • Advertising sales

    • Valuation

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Bestsellers and Blockbusters

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

  • Information Cascades (Bikhchandani et al.)

  • Public signal = observed decisions of previous decision makers

  • Consider a sequence of decision makers


Payoff = +1, probability = 1/2


Payoff = -1, probability = 1/2

Public Signal

Private Signal

High: p > .5 Low: p < .5

No: Payoff = 0, probability = 1

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Blockbuster Movies

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Outside Information



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Connecting Consumers:Cinematch


http://www.nytimes.com/2008/11/23/magazine/23Netflix-t.html?hp=&pagewanted=all (11/23/08)

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Cumulative Advantage

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

The Publisher

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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.

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No Longer a Fad

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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)

  • Cascades should occur most of the time.

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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?)

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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 ….

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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)

  • 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

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“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.

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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 Steele, Michael Crichton, Tom Clancy, and Mary Higgins Clark. Together, they sold just under 200,000,000 books.

Any others? (James Patterson: 20,000,000)

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Winner Take All Markets

  • A characteristic of winner take all markets: Barely perceptible quality difference spells the difference between success and failure.

    • Tiger Woods

    • The one stroke difference between #1 and #40 in golf

    • Opera – Pavarotti(?)

    • The iPod

    • Google?

    • YouTube?

    • Others?

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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

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A Theory of Winner Take All: Rosen on Superstars

  • Empirical regularity: skewed distribution of income in talent based industries

  • Underlying conditions of demand and supply combine to produce this result.

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An Economics of Superstars

  • What creates the skewness in the distribution of rewards?

    • Uneven distribution of talent

    • Huge economies of scale in production of “quality” in performance

    • Huge economies of scale in the delivery of performance

    • Relatively low cost of purchasing marginal increases in quality of performances at market equilibrium.

    • Result: rewards increase more than proportionally with increases in talent.

  • Implications?

    • Winner take all markets.

    • Investment by promoters in relatively few “acts”

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Winners Take All?

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Employing a well known theorem: $240M/0.016 = $15.0B


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Worth $15 Billion. Why?


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Entertainment and Media: Markets and Economics

End Class 1 – Part 2

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