Economics of Cultural Industries Tutorial: October 2 Fall 06

Assumptions from ECON 101 Limited resources Market is the most efficient mechanism to allocate those resources Supply and demand vary (to some extent) based on price Equilibrium met when the products priced to create equal demand and supply

What about cultural products? As we know, cultural products tend to have characteristics of semi-public goods –Not used up when consumed (non-rivalrous use) –Negative and positive externalities result in an oversupply of negative products and undersupply of positive products –Market may inaccurately measure preferences based on market transactions

Lets look at radio stations What are radio stations selling?

Lets look at radio stations What are commercial radio stations selling? Audiences -- in specific demographic groups -- for advertisers Programming is designed to attract specific demographic groups that are attractive to advertisers

Commercial radio stations In a competitive market with say 3 radio stations, what is the rational choice by the radio station to maximise revenues?

Commercial radio stations In a competitive market with say 3 radio stations, what is the rational choice by the radio station to maximise revenues? Attract the largest and most valuable demographic group for the lowest cost possible that can then be sold to advertisers

Commercial radio stations Result?

Commercial radio stations Result? Radio stations will tend to compete to attract the same demographic group

Commercial radio stations Result? Radio stations will tend to compete to attract the same demographic group The demographic group is split 3 ways Lesser numbers less valuable to advertisers = lower revenues for the radio stations

Commercial radio stations Different scenario: One company owns 3 radio broadcast licenses for a specific market No competition What is the most rational decision by the company?

Commercial radio stations Remember, the company wants to maximise profits It does this by maximising the audiences it can sell to advertisers

Commercial radio stations One rational decision would be –One licence for the most lucrative demographic group –Other two licences for DIFFERENT demographic groups What effect would this have?

Commercial radio stations Which scenario (competitive market or monopoly) provided: –The widest range of programming to audiences? –The largest aggregate group of audiences to advertisers? –Potentially, the greatest economic benefit?

Conclusion The competitive market does not always provide an optimal allocation of resources in the cultural industries

Economics of stars What is the purpose of a star culture in the cultural industries?

Economics of stars What is the purpose of a star culture in the cultural industries? The Myth: increases audiences and revenues

Economics of stars What is the purpose of a star culture in the cultural industries? The Myth: increases audiences and revenues The Reality: decreases risk

Economics of stars Recent research (for example, De Vany (2004), Sedgwick (various)) has found that the presence of a star/stars in a feature does not necessarily lead to financial success Stars do provide some guarantee of a minimum level of box office revenue

Economics of stars Recent research (for example, De Vany (2004), Sedgwick (various)) has found that the presence of a star/stars in a feature does not necessarily lead to financial success Stars do provide some guarantee of a minimum level of box office revenue But, no guarantee of box office success

Economics of stars So why pay large sums for stars?

Economics of stars So why pay large sums for stars? Perceived reduction of risk in decision-making (known success in the past) Easier to raise money Easier to sell product/promote

Economics of stars BUT:

Economics of stars BUT: “nobody knows anything” William Goldman in Adventures in the Screen Trade (1983)

Economics of stars BUT: “nobody knows anything” William Goldman in Adventures in the Screen Trade (1983) No-one knows ahead of time whether a particular cultural product will be a “hit”. It is a business with extremely high risk

Economics of the cultural industries Large corporations are risk-averse by nature Why do they engage in the cultural industries?

Economics of the cultural industries Large corporations are risk-averse by nature Why do they engage in the cultural industries? Because they find ways to minimise the risk

Economics of the cultural industries Portfolio approach - invest in a large number of products/creations Control of the distribution process Resell the product in multiple formats and in multiple markets Pass the development risk off to other parties (esp. the creators)