Market for Experience Goods

1. Market for Experience Goods

2. Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods

3. 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

4. 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

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

6. Derived Demand: A 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, 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, You’re 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

7. 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

8. Social Capital Stock Art Opera Movies Theater Books SportsYours? Gambling TV Politics Amusement Media Music Any Others?

9. 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).

10. 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.

11. Wal Mart and Social Capital Does Wal-Mart reduce social capital? Art Carden · Charles Courtemanche · Jeremy MeinersPublic Choice, 2009, 138: 109–136 • 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.

12. Wal-Mart and Social Capital

13. 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. 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.

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

15. Interdependent Demands Network Effects: Utility of person i depends directly on joint consumption with other people. Bandwagon Effects: Person i’s demand depends on the perceived demand of others

16. 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, WhatsApp • Implications: • Monopoly. Natural? Desirable? • This monopoly is demand based, not supply.

18. Interactive gaming

19. Facebook • The product • Information Sharing • Virtual Community • It’s not just for the fun of it. • Advertising sales • Valuation

20. 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.

22. $19,000,000,000 What did Facebook buy?

23. 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.

24. Bandwagon Effect Bandwagon effects: Person i’s 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) year’s hot toy (Furby) • Others?

25. 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.

26. 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)

27. Excess Demand is Great for Concert Demand  A 1998 Spice Girls concert at the Garden sold out within minutes.  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.”  In the 2007 Reunion Tour: A subsequent Dec. 15 one-off show at London's O2 Arena sold out in 38 seconds.

29. 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.

30. 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?)

31. Herding Behavior • Acting suboptimally (against one’s 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

32. Bestsellers and BlockbustersATheory of Herding Behavior Yes: P > .5 Decision FavorablePublic Signal Private Signal Yes: p = .5 No: p = .5 No: P < .5

33. Creating Cascades by Driving a Bestseller 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 ….

34. 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)

35. Blockbuster Movies

36. 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)

37. 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/23Netflix-t.html?hp=&pagewanted=all (11/23/08)

38. www.netflixprize.com

39. Why Do We Have the Academy Awards? http://wallethub.com/blog/economics-of-oscar-season/2124/

40. Outside Information: IMDb 2015 Razzie Award winner

41. 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.

42. A Theory of Cumulative Advantage “It sold well because lots of people bought it.” The Publisher

44. A Theory of J. K. Rowling’s Cumulative Advantage Harry Potter by J.K.Rowling. Extremely successful The Cuckoo’s Calling by Robert Galbraith – not so successful. The Cuckoo’s Calling by J.K. Rowling – much more successful. Success seems not to be a function of the intrinsic quality of the book, itself.

45. 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?)