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Demand for Experience Goods 1:2 - 1(59) Entertainment and Media: Markets and Economics Professor William Greene.

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Presentation on theme: "Demand for Experience Goods 1:2 - 1(59) Entertainment and Media: Markets and Economics Professor William Greene."— Presentation transcript:

1 Demand for Experience Goods 1:2 - 1(59) Entertainment and Media: Markets and Economics Professor William Greene

2 Demand for Experience Goods 1:2 - 2(59) Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods

3 Demand for Experience Goods 1:2 - 3(59) Understanding the Demand for Experience Goods Differences between experience and humdrum goods Motivation for consumption Aspects of demand Implications for markets

4 Demand for Experience Goods 1:2 - 4(59) Experience Goods vs. Utility Goods The classical theory of demand falls short when applied to markets for experience goods.

5 Demand for Experience Goods 1:2 - 5(59) Demand for a Good or Service from the Consumers Viewpoint Experience Good Utility Good Derived Demand Shared Experience Gasoline Final Demand Purely Personal, Internal Shoes

6 Demand for Experience Goods 1:2 - 6(59) Consumption of Experience Goods Commodities Consumption: Utilitarian Experience Goods - Motivation Purely internal Immediate utility (satisfaction) Rational addiction Interactive and interdependent Common interests - discourse Accumulation of social capital

7 Demand for Experience Goods 1:2 - 7(59) A Rational Addiction Theory Acquired taste such as opera, renaissance art, hip hop music Accumulated expertise – a capital stock This implies a decreasing demand elasticity as accumulated consumption increases (an addiction develops).

8 Demand for Experience Goods 1:2 - 8(59) A Rational Addiction Theory

9 Demand for Experience Goods 1:2 - 9(59) Implications of Rational Addiction Theory: This applies to certain kinds of experiences. Investment in promotion increases demand directly – part of the capital stock is awareness of the good. Increased demand becomes reduced elasticity – greater profitability beyond increased demand.

10 Demand for Experience Goods 1:2 - 10(59) Economic Foundations for Entertainment and Media The Demand for Experience Goods is Strongly Influenced by Interactions of Preferences and Consumption

11 Demand for Experience Goods 1:2 - 11(59) 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 (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, Bruno Mars, Fleetwood Mac, Music Choice Gadgets iPod, iPhone, Blackberry, Guitar Hero, Galaxy, Tesla

12 Demand for Experience Goods 1:2 - 12(59) 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

13 Demand for Experience Goods 1:2 - 13(59) Social Capital Stock Art Opera Movies Theater Books Sports Yours? Gambling TV Politics Amusement Media Music Any Others?

14 Demand for Experience Goods 1:2 - 14(59) 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 Implications for demand: A motivation for consumption beyond internal satisfaction.

15 Demand for Experience Goods 1:2 - 15(59) Others are aware of this: 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.

16 Demand for Experience Goods 1:2 - 16(59) Wal Mart and Social Capital 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. Does Wal-Mart reduce social capital? Art Carden · Charles Courtemanche · Jeremy Meiners Public Choice (2009) 138: 109–136

17 Demand for Experience Goods 1:2 - 17(59) 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. Bowling Alone Was About Social Capital

18 Demand for Experience Goods 1:2 - 18(59) Maintaining Your Social Capital Social media have greatly reduced the cost of maintenance and acquisition of social capital.

19 Demand for Experience Goods 1:2 - 19(59) Interdependent Demands Bandwagon effects d(i) = f [price, other prices, Income, d(j)] Amount demanded depends on the amount others have purchased (or are believed to have purchased) Applications Bestsellers (books, music, movies) Movies Electronic innovations This years hot toy Others?

20 Demand for Experience Goods 1:2 - 20(59) Implications of the 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.

21 Demand for Experience Goods 1:2 - 21(59) 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)

22 Demand for Experience Goods 1:2 - 22(59) Excess Demand 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. A 1998 Spice Girls concert at the Garden sold out within minutes. In the 2007 Reunion Tour: A subsequent Dec. 15 one-off show at London's O2 Arena sold out in 38 seconds.

23 Demand for Experience Goods 1:2 - 23(59) Excess Demand for U2

24 Demand for Experience Goods 1:2 - 24(59) 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 Implications: Monopoly. Natural? Desirable? Quepasa.com (is now meetme.com) This monopoly is demand based, not supply.

25 Demand for Experience Goods 1:2 - 25(59)

26 Demand for Experience Goods 1:2 - 26(59)

27 Demand for Experience Goods 1:2 - 27(59) Fastest Growing and Largest Website on the Planet Until 2007 What happened to Myspace? (1600 employees in 2008, 200 in 2011)

28 Demand for Experience Goods 1:2 - 28(59) 150,000,000 members (… 160, … 170,…500…900)

29 Demand for Experience Goods 1:2 - 29(59) Facebook The product Information Sharing Virtual Community Its not just for the fun of it. Advertising sales Valuation

30 Demand for Experience Goods 1:2 - 30(59) (Changing Face of Facebook) 2014 2012

31 Demand for Experience Goods 1:2 - 31(59)

32 Demand for Experience Goods 1:2 - 32(59) $19,000,000,000

33 Demand for Experience Goods 1:2 - 33(59) Herding Behavior 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 Herding behavior: Acting suboptimally (against ones best interest) in response to external information. (Lemmings) Information Cascades

34 Demand for Experience Goods 1:2 - 34(59) Bestsellers and Blockbusters Theory of Herding Behavior Favorable Public Signal Private Signal Yes: p =.5 No: p =.5 DecisionDecision No: P <.5 Yes: P >.5

35 Demand for Experience Goods 1:2 - 35(59) 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) Cascades should occur most of the time.

36 Demand for Experience Goods 1:2 - 36(59) 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 ….

37 Demand for Experience Goods 1:2 - 37(59) Outside Information: IMDb

38 Demand for Experience Goods 1:2 - 38(59) 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)

39 Demand for Experience Goods 1:2 - 39(59) Blockbuster Movies

40 Demand for Experience Goods 1:2 - 40(59) A Theory of Cumulative Advantage It sold well because lots of people bought it. The Publisher

41 Demand for Experience Goods 1:2 - 41(59) A Theory of Justin Timberlakes 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 Demand for Experience Goods 1:2 - 42(59) Harry Potter by J.K.Rowling The Cuckoos Calling by Robert Galbraith – not so successful. The Cuckoos Calling by J.K. Rowling – much more successful. A Theory of J. K. Rowlings Cumulative Advantage

43 Demand for Experience Goods 1:2 - 43(59) A Music Experiment Demonstrates Cumulative Advantage

44 Demand for Experience Goods 1:2 - 44(59) First Mover, No Longer a Fad

45 Demand for Experience Goods 1:2 - 45(59) The Roles that Critics and Experts Play Critical acclaim Academy Awards, All time best list, 100 Must See Films of the 20 th 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 99–111)

46 Demand for Experience Goods 1:2 - 46(59) Why Do We Have the Academy Awards? http://wallethub.com/blog/economics-of-oscar-season/2124/

47 Demand for Experience Goods 1:2 - 47(59) Cascades and Experience Goods Why 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 – endogeneity of reviews What role do prizes play? (Oscars, MTV Video Awards?)

48 Demand for Experience Goods 1:2 - 48(59) Winner Take All Markets The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness. (Kurt Vonnegut, Bluebeard, 1987.) The Winner-Take-All Society, Frank, R., Cook, P., Penguin, 1995. Sherwin Rosen, The Economics of Superstars, AER, 1981.

49 Demand for Experience Goods 1:2 - 49(59) 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 Steel, Michael Crichton, Tom Clancy, and Mary Higgins Clark. Together, they sold just under 200,000,000 books. Any others? James Patterson: 20,000,000 J.K.Rowling 400,000,000+ Danielle Steel 800,000,000+

50 Demand for Experience Goods 1:2 - 50(59) Winner Take All Markets A characteristic of winner take all markets: Barely perceptible quality difference spells the difference between success and failure. (Early) Tiger Woods The one stroke difference between #1 and #40 in golf Opera – Pavarotti(?) The iPod Google? YouTube? Others?

51 Demand for Experience Goods 1:2 - 51(59) 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? Facebook) Production cloning and economies of scale Risk avoidance by consumers Consumers desire to accumulate common social capital

52 Demand for Experience Goods 1:2 - 52(59) A Theory of Winner Take All: Rosen on Superstars Empirical regularity: extremely skewed distribution of income in talent based industries Small differences in quality translate to large skewness in the distributions of success Underlying conditions of demand and supply combine to produce this result.

53 Demand for Experience Goods 1:2 - 53(59) Alan Krueger: Rockonomics

54 Demand for Experience Goods 1:2 - 54(59) Winners Take All In 2002?

55 Demand for Experience Goods 1:2 - 55(59) Winners Still Take All In 2008

56 Demand for Experience Goods 1:2 - 56(59) And In 2011

57 Demand for Experience Goods 1:2 - 57(59) Price effect or quantity effect? Mainly quantity.

58 Demand for Experience Goods 1:2 - 58(59) Sales of concert tickets, a vital measurement of the health of the music industry, returned to their former strength in 2012 after two slow years, with Madonna and Bruce Springsteen leading the most popular tours. The results, however, point to two trends that have long worried critics of the business: rising prices and the predominance of aging superstars whose fans care little about their new material. The top 100 tours in North America had $2.5 billion in gross ticket sales last year, nearly equal to their peak three years ago, according to Pollstar, a trade publication. Madonna was the biggest attraction, with $134 million in sales, followed by Cirque du Soleils tribute to Michael Jackson, The Immortal, which had $113 million; Mr. Springsteen was No. 3 with $105 million. Madonna also topped Pollstars worldwide chart, with $296 million in gross sales, followed by Mr. Springsteen with $210 million. These numbers are welcome for the concert business, which faltered in 2010 after more than a decade of swift growth, for reasons variously attributed to the recession, weak lineups and overpriced tickets. It had only a slight rebound in 2011. Yet fewer tickets were being sold at higher prices. Fans bought 36.7 million tickets for the Top 100 tours in North America last year, still down from 40.5 million in 2009. Last year, the cost of an average ticket rose to a record $68.76. The Rolling Stones handful of 50th anniversary shows was the most expensive, at an average of $519. And while fans flocked to see Madonna and Mr. Springsteen in concert, they largely avoided their new albums. Madonnas MDNA, released last year, sold 527,000 copies, according to Nielsen SoundScan; as many as a third of those were given away with the purchase of a ticket, according to estimates. Mr. Springsteens Wrecking Ball, also released last year, sold 490,000 copies. Changing Demographic Effects

59 Demand for Experience Goods 1:2 - 59(59) How does demand for experience goods differ from demands for humdrum goods? End Class 1 – Part 2


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