Presentation on theme: "Rockonomics: Economics & Public Policy in the Rock & Roll Industry Economics of Ticket Pricing Industry Trends Long-Run Explanations Superstar Model Baumol."— Presentation transcript:
Rockonomics: Economics & Public Policy in the Rock & Roll Industry Economics of Ticket Pricing Industry Trends Long-Run Explanations Superstar Model Baumol & Bowens Disease Wealth Effects Short-Run Explanations Concentration Complimentary Goods Under Priced Asset Alan B. Krueger
Somebody said to me, But the Beatles were antimaterialistic. Thats a huge myth. John and I literally used to sit down and say, Now, lets write a swimming pool. -- Paul McCartney [I]n some fashion, I help people hold on to their own humanity, if I'm doing my job right. -- Bruce Springsteen I dont see how carving out the best seats and charging a lot more for them has anything to do with rock & roll. -- Tom Petty
To maximize short run profit Price Discriminate Charge more to those who are less price sensitive Extreme example is variation in prices for airline seats Dont go overboard because of tie-in sales & fan loyalty
Seven Lessons from Super Bowl Sunday New York Times List price was $325 in 2000; market price was around $2,500 Secondary market develops if price too low, but its size can be exaggerated (20%) Endowment effect NFL could raise short-run profit by raising prices But NFL wants to reward loyal fans to build enterprise Besides, 60% of $4 billion of football revenue from TV Gift Exchange
Price of the 90th, 50th, and 10th Percentile - All Artists year 198119861991199620012003 0 20 40 60 80 Price Prices are Growing Faster at the Top
Further Analysis October 2001 edition of Rolling Stones Encyclopedia of Rock and Roll Consistent universe of artists 1,786 artists, from Abba to ZZ Top; 1,274 in Pollstar database Responsible for 75% of ticket sales, 1981-2003. Merged on additional data: year formed; gender; genre; prominence (mm)
Average Price Increase Understates Rise for a Consistent Set of Artists Average Price for Artists Listed in Rolling Stone Encyclopedia Source: Alan Kruegers computations based on Pollstar and BLS data.
Scalping and List Prices Survey at Springsteen The Rising Concert, Oct. 6, 2003 in Philadelphia, PA. Every ticket sold for $75. Stratified random cluster sample of seats. Interviewed 858 people in the 15 minutes before the start of the show. Short questionnaire on index card. Very high response rate. 20-25 percent of tickets scalped. Worst seats more likely to be resold. Average resale price was $300. Springsteen gave away $3 million in consumer surplus
Explanations For Two Key Facts Need To Be Found: Long run faster growth in concert prices than inflation Short-run acceleration in prices the last 5 years
The Economics of Superstars Sherwin Rosen (AER 1981) If undergoing heart surgery, willing to pay a lot more for the best surgeon over the second best surgeon Imperfect substitutes Convex reward function Plus, size of market Best can reach more customers Human capital would not have a linear effect – twice as good paid more than twice as much
Superstars are known to a broader audience because of technology Improved technology differentiates the best from the rest and permits bigger audience (unlike Ms. Billington) Demand to hear the very best is higher Rewards for the best should rise Apply to Rock & Roll
Log Difference in Price for 1 Standard Deviation Change in Star Quality for Encyclopedia Bands The Return to Star Quality on Log Price Log Difference Note: Based on multiple regressions of log annual revenue on millimeters of print, year dummies and covariates. Sample consists of 10,043 artist/year observations. See Table 3, col. 4.
Effect of 1 SD Change in Star Quality on Log Revenue per Show for All Artists The Return to Star Quality on Revenue per Show Log Difference Note: Based on multiple regressions of log annual revenue on millimeters of print, year dummies and no. of support acts. Sample consists of 35,835 artist/year observations. See Table 1, col. 3.
Effect of 1 SD Change in Star Quality on Log Revenue per Show for Encyclopedia Bands The Return to Star Quality on Revenue per Show Log Difference Note: Based on multiple regressions of log annual revenue on millimeters of print, year dummies and covariates. Sample consists of 10,043 artist/year observations. \ See Table 3, col. 6.
GenderAge of Band Genre Note: Based on a multiple regression of log price on millimeters of print, age of band, gender of band, genre of music, foreign vs. U.S. group, and year dummies. Sample consists of 79,375 concerts performed by 1,253 artists. Weighted average price indexed to 2001 average price. Average Price for Selected Characteristics, All Else Equal
Tina Turner: Whats Age Got to Do With It? As Artists Age, the High-Low Ticket Price Ratio Rises Ratio of High to Low Price 19821986199119962000 1 1.5 2 2.5
Baumol and Bowens Disease Takes same amount of time and input to play Free Bird Concerts are a low productivity growth sector (modular technological change) Would expect prices in low productivity growth sectors to grow relatively quickly
As society becomes wealthier people demand more leisure and higher quality leisure activities Demand for leisure is a super normal good – the share of income devoted to leisure rises with income Price of most leisure activities is growing relatively fast The demand for leisure is likely to continue to grow The Demand for Leisure has Risen with Wealth 18501900195020002050 2 4 6 8 Leisure Hours Per Day Source: Robert Fogel (1999).
What Explains Recent Price Growth? Production Costs Increased Consolidation Decline in Complementary Revenue Source: Record Sales Undervalued Asset
Industry Consolidation Vertical Concentration - Venues - Radio - Marketing, etc. Horizontal Concentration - SFX, Clear Channel Clear Channel
Telecommunications Act of 1996 Signed Feb. 8, 1996 Prior to 1996 Act, radio stations could own just 40 stations nationally, and 2 in a market Cap eliminated nationwide, and raised to 8 in a market Since 1996, 10,000 radio station transactions worth $100 billion Further legislation could lead to consolidation with TV and newspapers
The Industry Has Become More Concentrated Recently Percent of Total Revenue Handled by Biggest Four Promoters – All Artists year 198119861991199620012003 20 40 60 80 Percent of Ticket Sales
198119861991199620012003 20 40 60 80 Nationally, the Industry Has Become More Concentrated Recently Percent of Total Revenue Handled by Biggest Four Promoters - Top Artists Percent of Ticket Sales Source: Calculated by Alan Krueger based on Pollstar data. Only concerts performed in the U.S. are included in the analysis. Sample consists of artists listed in Rolling Stone Encyclopedia. 41% CC
Change in Big-Four Concentration Ratio -50050100 -.5 0.5 1 1.5 2 r = 0.04 Change in Prices vs. Change in Big-Four Concentration Ratio, 1993-94 to 2000-2001; 98 Largest Cities Proportionate Change in Price
Share of Concert Revenue, 2000-01 Share of FM Radio Market, 2002 0.1.2.3.4.5 0.25.5.75 1 Clear Channels Share of Concert Revenue versus their Share of Radio Listeners across 98 Largest Radio Markets r = 0.01
Herfindahl-Hirschman Index for Venues, 1986-2001 Note: Venues that are exclusively used by one promoter in a year in a particular city are pooled together into one conglomerate. An industry with an HHI above 1,8000 is considered highly concentrated according to the Justice Department Merger Guidelines. Average Across 24 Largest Cities Average HHI
Surge in Average Price Per Concert Ticket in Canada is Similar to that in the United States – 67% Nominal Growth from 1996 to 2001 Grow at U.S. CPI Avg. Price
Alternative Model - Complementary Goods Dependent Demands with Shift in Record Market Records and Concerts are complementary goods Because of new technology, the complementarity is weaker Source: New York Times, Feb. 25, 2002, p. C1. Total Albums and Singles Shipped Billions of Units
Music shipments were down an estimated 9.6 percent last year, after declining 7 percent in 2000. Sales were flat 1994 to 2000.
pDCpDCpDpDp 22112211 pmax 11 122 ' 22 111 ' 11 1 11 Dp DCp p Cp Bands Produce 2 Complementary Goods with Market Power Good 1: Concert Tickets Good 2: Record Sales
Music itself is going to become like running water or electricity. So its like, just take advantage of these last few years because none of this is ever going to happen again. Youd better be prepared for doing a lot of touring because thats really the only unique situation thats going to be left. Its terribly exciting. But on the other hand it doesnt matter if you think its exciting or not; its whats going to happen. David Bowie The New York Times June 9, 2002 11 122 ' 22 111 ' 11 1 11 Dp DCp p Cp
Monopolistic Price Setting Concerts Only Marginal Cost Concerts Concert Price Demand for concerts Marginal Revenue P Q
Marginal Cost Concerts Concert Price Demand for concerts Marginal Revenue P Q P Q Monopolistic Price Setting with Complementary Product: Records
Marginal Cost Concerts Concert Price Demand for concerts Marginal Revenue Q P Q Revenue from Complementary Product Falls Because of MP3, etc. P
Superbowl Concerts Theres A Long Way to Go to Catch the Super Bowl! Price
Conclusions Rising superstar effects, but not accelerating To understand the market must understand industrial organization and technology Legal changes that allowed Clear Channel to dominate industry may be overrated Antitrust action in future? Revised Telecom Act? Complementarities between concerts and album sales key to market for Rock Stars?