More Aspects of Demand for Experience Goods 1:E - 1(31) Market for Experience Goods

More Aspects of Demand for Experience Goods 1:E - 2(31) Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods

More Aspects of Demand for Experience Goods 1:E - 3(31) 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 one’s best interest) in response to external information. (Lemmings)  Information Cascades

More Aspects of Demand for Experience Goods 1:E - 4(31) 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 ….

More Aspects of Demand for Experience Goods 1:E - 5(31) Cascades and Experience Goods Why 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?)

More Aspects of Demand for Experience Goods 1:E - 6(31) 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.

More Aspects of Demand for Experience Goods 1:E - 7(31) 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

More Aspects of Demand for Experience Goods 1:E - 8(31) Blockbuster Movies

More Aspects of Demand for Experience Goods 1:E - 9(31) 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 2—Spring 2003—Pages 99–111)

More Aspects of Demand for Experience Goods 1:E - 10(31) Connecting Consumers: Cinematch PERSONALIZED MOVIE RECOMMENDOR PROVIDES NETFLIX VISITORS WITH HIGHLY ACCURATE FILM RECOMMENDATIONS BASED ON THEIR INDIVIDUAL MOVIE TASTE HISTORY (11/23/08)

More Aspects of Demand for Experience Goods 1:E - 11(31) Why Do We Have the Academy Awards?

More Aspects of Demand for Experience Goods 1:E - 12(31) Outside Information: IMDb

More Aspects of Demand for Experience Goods 1:E - 13(31) A Theory of Cumulative Advantage “It sold well because lots of people bought it.” The Publisher

More Aspects of Demand for Experience Goods 1:E - 14(31) 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.

More Aspects of Demand for Experience Goods 1:E - 15(31) Harry Potter by J.K.Rowling The Cuckoo’s Calling by Robert Galbraith – not so successful. The Cuckoo’s Calling by J.K. Rowling – much more successful. A Theory of J. K. Rowling’s Cumulative Advantage

More Aspects of Demand for Experience Goods 1:E - 16(31) A Music Experiment Demonstrates Cumulative Advantage

More Aspects of Demand for Experience Goods 1:E - 17(31) 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, Sherwin Rosen, “The Economics of Superstars,” AER, 1981.

More Aspects of Demand for Experience Goods 1:E - 18(31) A Winner Take All Market Of the top 50 best sellers of all types in , 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+

More Aspects of Demand for Experience Goods 1:E - 19(31) 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?

More Aspects of Demand for Experience Goods 1:E - 20(31) 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

More Aspects of Demand for Experience Goods 1:E - 21(31) Winner Take All Markets: Bigger Markets; Winners have larger shares

More Aspects of Demand for Experience Goods 1:E - 22(31) 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.

More Aspects of Demand for Experience Goods 1:E - 23(31) Alan Krueger: “Rockonomics”

More Aspects of Demand for Experience Goods 1:E - 24(31) Winners Take All In 2002?

More Aspects of Demand for Experience Goods 1:E - 25(31) Winners Still Take All In 2008

More Aspects of Demand for Experience Goods 1:E - 26(31) And In 2011

More Aspects of Demand for Experience Goods 1:E - 27(31) Price effect or quantity effect? Mainly quantity.

More Aspects of Demand for Experience Goods 1:E - 28(31) 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 Soleil’s tribute to Michael Jackson, “The Immortal,” which had $113 million; Mr. Springsteen was No. 3 with $105 million. Madonna also topped Pollstar’s 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 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 Last year, the cost of an average ticket rose to a record $ 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. Madonna’s “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. Springsteen’s “Wrecking Ball,” also released last year, sold 490,000 copies. Changing Demographic Effects

More Aspects of Demand for Experience Goods 1:E - 29(31) 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).

More Aspects of Demand for Experience Goods 1:E - 30(31) A Rational Addiction Theory

More Aspects of Demand for Experience Goods 1:E - 31(31) 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.