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Entertainment and Media: Markets and Economics. Professor William Greene. Professor William Greene Department of Economics KMC, Rm. 7-90 212.998.0876 people.stern.nyu.edu/wgreene wgreene@stern.nyu.edu people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm Find link on Sternclasses.

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slide2

Professor William Greene

Department of Economics

KMC, Rm. 7-90

212.998.0876

people.stern.nyu.edu/wgreene

wgreene@stern.nyu.edu

people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm

Find link on Sternclasses

slide3

http://people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htmhttp://people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm

course objective
Course Objective

Broad microeconomics based understanding of the economic forces that shape the entertainment and media industries

why entertainment industry economics
Why “Entertainment Industry Economics?”
  • There Are Unique Aspects of the Market
    • Creative talent in production – the creator has a personal interest in the product.
    • Pricing decisions – many opportunities for strategic pricing.
    • Zero marginal cost, production vs. replication/distribution.
    • Relationship between buyer and seller – artists and fans.
    • Market complementarities shape market structures – winner take all markets.
    • Demand aspects are unlike conventional commodity markets.
  • There Are Some Commonalities that Allow Conventional Economic Analyses
    • Production concepts – the nature of production and supply, technological change.
    • Market dynamics – market structure, market power, market outcomes.
    • Demand concepts – elasticity, consumer surplus, pricing.
segments of the entertainment and media market
Segments of The Entertainment and Media Market
  • Movies
  • Television (Broadcast, Cable) and Radio
  • Theater
  • Publishing (Print, Electronic, Music)
  • Music
  • Sports
  • Art
  • Gambling
  • Electronic Games (Internet)
  • Amusement and Theme Parks
  • Hobbies
  • Etc.
course agenda
Course Agenda

1: The Demand for Experience Goods

2: Supply. Production, Costs, Markets, Vertical Integration

3: Contracts, Boundaries of the Firms, Conglomerates,Digital Entertainment Business Models

4: Intellectual Property: Laws, Movies, Books, Music

5: Markets: Sports, Art, Gambling, Theater, Publishing, etc.

6: TV, Radio, Print Media, Others

analyzing the experience economy
Analyzing The Experience Economy
    • Examine the entertainment and media business with conventional economic tools
    • Demand: Nature and Source
    • Supply: Characteristics of Production and Distribution
    • Costs and Profits
    • Pricing: How prices are determined
    • “Value”
    • Market Outcomes: Structure, Prices, etc.
  • Note interesting special characteristics of the experience industry
    • Features of the demand
    • Aspects of supply and production
long run trend hours worked us 1850 1956
Long Run Trend: Hours Worked US 1850-1956

Hours worked stops falling; hours spent on recreation (not working) stops rising.

slide13

Economic fluctuations have much greater impact on manufacturing than on services.

Recent trend in hours worked (weekly, average), 1965-2009

spending on recreation is growing in absolute terms
Spending on recreation is growing in absolute terms

Per capita, real spending on recreation

and recreation services.

the long run trend in recreation expenditure as a proportion of real income is growing
The long run trend in recreation expenditure as a proportion of real income is growing

Recreation as a % of Disposable Income

the form of recreation spending is changing
The form of recreation spending is changing

Service Component of Recreation Expenditures

Service = Movies, Sports, … (passive) 1959-2009

adding it up
Adding It Up
  • Household income is not rising very much
  • Time spent working is steady or falling slightly
  • Time spent on recreation is no longer rising
  • Budget allocated to:
    • entertainment, health care are rising
    • food and clothing are falling
  • Growing entertainment market is driven by
    • budget reallocation
    • changes in preferences.
    • changing technologies and falling prices
  • Demand in the recreational segment of the economy is rising faster than overall output.
consumers allocate their budget to maximize their well being
Consumers allocate their budget to maximize their well being
  • A standard model for consumer behavior
  • Utility maximization over choices subject to resource constraints:
    • Income and Prices
    • Time
time is the ultimate binding constraint
Time Is the Ultimate Binding Constraint
  • Consumers: Maximize Utility (Consumption, Leisure)
  • Constraints that limit the amounts they can consume
    • Available INCOME = Savings + Wage*Labor
    • PRICES
      • Pcons = Goods Prices
      • Pleisure = Wage Rate = opportunity cost of leisure
    • Available TIME = Labor + Consumption + Leisure
  • At least for the short term, the wage (ability to earn) is fixed
  • Tradeoff: To consume more, we must work more, leaving less time for leisure.
  • The fixed amount of time is ultimately the binding constraint
implications of the theory for changes over time
Implications of the Theory for Changes Over Time
  • As Wage rises, leisure becomes more expensive.
  • As Income rises, leisure becomes more desirable.
  • Net effect over time if real wages and incomes rise?
    • Higher incomes generally lead to greater demand for leisure – leisure is a normal good
    • Higher wages make leisure more expensive – consumers desire greater consumption rather than leisure. Hours worked are not falling very much any more.
  • Not clear which way the result will go
    • Per capita income in the U.S. is not rising much at all.
    • Demand for entertainment seems to be rising – cultural shifts.
allocating the consumer s budget
Allocating the Consumer’s Budget
  • Consumer Budgets
    • Housing
    • Transportation
    • Food
    • Clothing
    • Medical and Physical Upkeep
    • Recreation (and other stuff)
  • Allocation Based On
    • Relative prices
    • Income
    • Culturally influenced preferences.
slide24

The household budget.

(2014 looks like 2010.

Not much change in broad allocation.)

Food $ 6373

Housing $16895

Clothing $ 1725

Transportation $ 7658

Health Care $ 3126

Entertainment $ 2693

Insurance $ 5471

Everything Else $ 5127

http://www.creditloan.com/infographics/how-the-average-consumer-spends-their-paycheck/

consumer spending by income class
Consumer Spending by Income Class

Category Avg Top

Income $ 51G $127G

Food 6.1% 7.1%

Health care 4.2% 2.8%

Entertain. 4.0% 3.6%

Clothing 3.3% 2.6%

Education 1.5% 1.7%

Housing About 31%

Transportation “ 16%

Other “ 35%

The figures suggest consumers reallocate spending as incomes change.

Careful! This shows a difference between consumers, not the change in behavior of a particular consumer. It is only suggestive.

e m is a large industry
E&M Is a Large “Industry”
  • Total Economy $15,000b
    • Entertainment and Media 6.4%
    • Health Care 19.0%
    • Recreation of all kinds $ 725b
    • (Games, sports, clubs, …)
  • Print Media $ 110b

(Books, magazines, newspapers,…)

  • Movies in theaters $ 12b
  • (2011, current $, all figures approximate)
aspects of the demand for recreation
Aspects of the Demand for Recreation
  • Trends in Consumption
  • A Standard Microeconomic Model for Demand
  • Problems Applying the Model to Experience Goods
    • Implicit prices and time constraints
    • Derived demands and social capital
    • Rational addiction
    • Interdependent demands, fads and herding
    • Winner take all markets
slide29
HUMDRUM vs. EXPERIENCE GOODMarket for a conventional commodityWhy does one buy a toaster or a wrench?
  • Functionality of the product
  • Utilitarian nature of demand
  • ‘Experience’ (even aesthetics generally secondary or irrelevant)
ordinary economics apply to the market for toasters
Ordinary Economics Apply to the Market for Toasters
  • Costs of production
    • Variable vs. fixed costs
  • Cost characteristics
    • Economies of scale
    • Economies of scope
    • Technological change
  • Profit
  • Firms in markets: market power and brand identity, etc.
familiar market outcomes in commodity markets
Familiar Market Outcomes in Commodity Markets
  • Market power
  • Monopoly
  • Competition
  • Branding
  • Market segmentation
the demand for experience goods is unlike familiar commodity markets
The Demand for Experience Goods is Unlike Familiar Commodity Markets
  • What is the good?
  • Two qualities that differ between experience and “humdrum” goods
    • Intangible nature of the good
    • External effects of consumption
  • Motivation for consumption
  • Aspects of demand
  • Implications for markets
experience humdrum goods goods
Experience Humdrum Goods Goods
  • How do these markets differ?
  • What do they have in common?
goods the coolest computer ever made
Goods: The Coolest Computer Ever Made

Why did it fail the market test?

slide36
?

Did it fail because it looked like a toaster?

market leader
Market Leader

Also cool. Why did it pass the market test?

even more cool
Even More Cool

What differentiates this cool appliance from the coolest computer ever made?

iphone as fashion statement
iPhone as Fashion Statement

New York Times, April 2, 2012, page B1.

also a shared experience
Also a Shared Experience

Different from a book? How so – from the consumers viewpoint?

Same as a book? How so – from the economist’s viewpoint?

slide43

Shared Simultaneous and Coincident Experience

The Antichrist

[T]he art film has been ghettoized as audiences have fragmented into niche markets. The very notion of what a movie audience is has changed: how do you arouse a public when many are no longer watching movies publicly, but sitting at home in front of their entertainment centers? It's a powerful feeling to share an audience's collective gasp, such as the one elicited by a startling suicide in Michael Haneke's Cache’.That can't be duplicated in solitude. But increasingly rare is the breakthrough movie, such as a Blue Velvet or a Brokeback Mountain, that reaches a mass audience. These days we get our culture jolts in daily, bite-size portions on YouTube or Facebook, a kind of viral fast-food diet of scandal, easily digested and quickly forgotten. [David Ansen, Newsweek, 10/26/09, p. 48]

shared experience
Shared Experience?

Not quite a theater experience.

Definitely in great demand.

experience
Experience?

Trump pushed to make the new shuttle a luxury service… The Shuttle’s core passengers chose it for its convenience, not its costly luxury features. Trump Shuttle never turned a profit.

entertainment and media markets and economics49

Entertainment and Media: Markets and Economics

What differentiates the demand for experience goods from the demand for humdrum goods?