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 Market for Experience Goods 1: D - 1(45) Aspects of Demand for Experience Market for Experience Goods 1: D - 1(45) Aspects of Demand for Experience Goods

Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods Economic Foundations for Entertainment and Media Special Features of the Demand for Experience Goods 1: D - 2(45) Aspects of Demand for Experience Goods

Aspects of the Demand for Recreation Start from a standard microeconomic model for demand 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 1: D - 3(45) Aspects of Demand for Experience Goods

Aspects of the Demand for Recreation Problems applying the standard model to experience goods 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 1: D - 4(45) Aspects of Demand for Experience Goods

Demand for a Good or Service from the Consumer’s Viewpoint Experience Good Derived Demand Demand for a Good or Service from the Consumer’s Viewpoint Experience Good Derived Demand Final Demand 1: D - 5(45) Humdrum Good Shared Experience (Bowling) (Gasoline) Purely Personal Experience (Book) (Hammer) Aspects of Demand for Experience Goods

Derived Demand: A Social Capital Stock Art Dali, Pollock, Monet, Picasso, Barnett, O’Keefe, Warhol, Derived Demand: A Social Capital Stock Art Dali, 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, KONY 2012 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, You. Tube Music Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem, VMA, Dire Straits, Billy Joel, Bruno Mars, Fleetwood Mac, Music Choice Gadgets i. Pod, i. Phone, Blackberry, Guitar Hero, Galaxy, Tesla 1: D - 6(45) Aspects of Demand for Experience Goods

Someone Else’s Capital Stock Art Opera Movies Theater Books Sports Gambling TV Politics Amusement Someone Else’s Capital Stock Art Opera Movies Theater Books Sports Gambling TV Politics Amusement Media Music Arnold Böcklin The Truman Show, Tinklebell, Pulp Fiction, The Matrix Max Dendermonde, Simon Vestdijk, Gabriel García Márquez Martin Morning, Sesame Street, Mega Mindy, Kim Possible, The Five, Phineas and Ferb Family games NRC, Le Monde, Nice Matin, Dagens Industry, Wikipedia, Reuters XFM, Slam. FM, Non. Stop. Play. com, Radio 4. nl, BBC World Service, France Inter, DJ Tiesto, Yelle, Eminem, Queen, Michael Jackson, Lionel Richie, ABC, Robbie Williams 1: D - 7(45) Aspects of Demand for Experience Goods

Social Capital Stock Art Opera Movies Theater Books Sports Gambling TV Politics Amusement Media Social Capital Stock Art Opera Movies Theater Books Sports Gambling TV Politics Amusement Media Music Any Others? 1: D - 8(45) Yours? Aspects of Demand for Experience Goods

The Social Capital Stock Functions it serves in the community p Aspects – It The Social Capital Stock Functions it serves in the community p Aspects – It is similar to other capital stocks p n n n p 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). 1: D - 9(45) Aspects of Demand for Experience Goods

TIVO Capital Ti. Vo has made me realize that “pulling the plug” rather than TIVO Capital Ti. Vo has made me realize that “pulling the plug” rather than recording shows separates the TV boycotter from the rest of society. My Ti. Vo allows me to contribute to conversations revolving around TV rather than silently observing them. 1: D - 10(45) Aspects of Demand for Experience Goods

Wal Mart and Social Capital Does Wal-Mart reduce social capital? Art Carden · Charles Wal Mart and Social Capital Does Wal-Mart reduce social capital? Art Carden · Charles Courtemanche · Jeremy Meiners Public Choice, 2009, 138: 109– 136 Increases consumption of “humdrum goods” with less external connectedness p Reduce connection to the community by lowering viability of small “local” businesses p (Unfortunately, the empirical data did not support the hypothesis. ) p n n Difficult to devise a persuasive empirical test The test they devised did not support the claim. 1: D - 11(45) Aspects of Demand for Experience Goods

Wal-Mart and Social Capital 1: D - 12(45) Aspects of Demand for Experience Goods Wal-Mart and Social Capital 1: D - 12(45) Aspects of Demand for Experience Goods

Bowling Alone Was About Social Capital Putnam warns that our stock of social capital 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. 1: D - 13(45) Aspects of Demand for Experience Goods

Maintaining Your Social Capital Social media have greatly reduced the cost of maintenance and Maintaining Your Social Capital Social media have greatly reduced the cost of maintenance and acquisition of social capital. 1: D - 14(45) Aspects of Demand for Experience Goods

Interdependent Demands Network Effects: Utility of person i depends directly on joint consumption with 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 1: D - 15(45) Aspects of Demand for Experience Goods

Network Externalities · · Utility from use of a good by a person depends 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, Linked. In, Twitter, Whats. App Implications: · Monopoly. Natural? Desirable? · This monopoly is demand based, not supply. 1: D - 16(45) Aspects of Demand for Experience Goods

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Interactive gaming 1: D - 18(45) Aspects of Demand for Experience Goods Interactive gaming 1: D - 18(45) Aspects of Demand for Experience Goods

Facebook p The product n Information Sharing n Virtual Community p It’s not just Facebook p The product n Information Sharing n Virtual Community p It’s not just for the fun of it. n Advertising sales n Valuation 1: D - 19(45) Aspects of Demand for Experience Goods

Implications of Network Externalities · Early applications: Utilities · Natural monopoly · Supply side 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 Mac. OS emulators for Windows computers) · Social network – Facebook, Linked. In, Twitter, Whats. App · · Implications: · Rapid growth – vast economies of scale · Monopoly. · · 1: D - 20(45) Natural? Desirable? (The European Commission dislikes Google. ) This monopoly is demand based, not supply. Aspects of Demand for Experience Goods

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$19, 000, 000 What did Facebook buy? 1: D - 22(45) Aspects of Demand $19, 000, 000 What did Facebook buy? 1: D - 22(45) Aspects of Demand for Experience Goods

Bandwagon Effects The bandwagon effect is a psychological phenomenon whereby people do something primarily 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. 1: D - 23(45) Aspects of Demand for Experience Goods

Bandwagon Effect Bandwagon effects: Person i’s demand depends on the perceived demand of others 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 others have purchased (or are believed to have purchased) Applications · · · Bestsellers (books, music) Blockbuster movies (Star Wars) Electronic innovations (i. Phone 6) This (every) year’s hot toy (Furby) Others? 1: D - 24(45) Aspects of Demand for Experience Goods

Implications of the Bandwagon Theory Elasticity of demand increases as sales increase (1) Demand 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. 1: D - 25(45) Aspects of Demand for Experience Goods

Extreme Case: Concerts i d(i) = i d(i)[price, other prices, Income, D] D = Extreme Case: Concerts i d(i) = i d(i)[price, other prices, Income, D] D = total demanded (observed by the consumer) Ø Total demand depends on observed total demand Ø Effect can appear to produce positive relation between price and quantity. (Note, not a “demand curve. ”) Ø For the concert, MC = 0 (or close to it) Ø End result: Profit = revenue maximization may occur with excess demand (fans outside the facility) Ø 1: D - 26(45) Aspects of Demand for Experience Goods

Excess Demand is Great for Concert Demand A 1998 Spice Girls concert at the Excess Demand is Great for Concert Demand A 1998 Spice Girls concert at the Garden sold out within minutes. Paul Mc. Cartney’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 O 2 Arena sold out in 38 seconds. 1: D - 27(45) Aspects of Demand for Experience Goods

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Rationalizing Bandwagons by Asymmetric Information and Choice Strategy Such bandwagon effects are not necessarily Rationalizing Bandwagons by Asymmetric Information and Choice 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. 1: D - 29(45) Aspects of Demand for Experience Goods

Cascades and Experience Goods Why are experience goods susceptible to herding, cascades and fads? Cascades and Experience Goods Why are experience goods susceptible to herding, cascades and fads? p Can’t assess quality without consuming n n p Limited value of advertising Inherent uncertainty in consumption Social capital aspect of consumption n Network effects n p Membership and social standing Sources of outside information – critics and certifiers n n Riskiness of critical information – upward bias of reviews What role do prizes play? (Oscars, MTV Video Awards? ) 1: D - 30(45) Aspects of Demand for Experience Goods

Herding Behavior Ø Acting suboptimally (against one’s best interest) in response to external information. Herding Behavior Ø Acting suboptimally (against one’s best interest) in response to external information. (Lemmings) Ø Information Cascades p p p Should I read the book, see the movie, buy the product, … Consumers assemble 2 kinds of information to make the decision: n Private signals: Their own information and opinions n 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 1: D - 31(45) Aspects of Demand for Experience Goods

Bestsellers and Blockbusters A Theory of Herding Behavior Favorable Public Signal Private Signal Yes: Bestsellers and Blockbusters A Theory of Herding Behavior Favorable Public Signal Private Signal Yes: p =. 5 No: p =. 5 1: D - 32(45) D e c i s i o n Yes: P >. 5 No: P <. 5 Aspects of Demand for Experience Goods

Creating Cascades by Driving a Bestseller And …. The Discipline of Market Leaders (1995). Creating Cascades by Driving a Bestseller And …. 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. 1: D - 33(45) Aspects of Demand for Experience Goods

Inference from Cascades Model Ø Ø Cascades occur as individuals substitute others’ actions for Inference from Cascades Model Ø Ø Cascades occur as individuals substitute others’ actions for their own private information Outside information comes from certifiers (critics, film buffs, awards) 1: D - 34(45) Aspects of Demand for Experience Goods

Blockbuster Movies 1: D - 35(45) Aspects of Demand for Experience Goods Blockbuster Movies 1: D - 35(45) Aspects of Demand for Experience Goods

The Roles that Critics and Experts Play p Critical acclaim n n n p The Roles that Critics and Experts Play p Critical acclaim n n n p p 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) 1: D - 36(45) Aspects of Demand for Experience Goods

Connecting Consumers: Cinematch PERSONALIZED MOVIE RECOMMENDOR PROVIDES NETFLIX VISITORS WITH HIGHLY ACCURATE FILM RECOMMENDATIONS 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/23 Netflix-t. html? hp=&pagewanted=all (11/23/08) 1: D - 37(45) Aspects of Demand for Experience Goods

www. netflixprize. com 1: D - 38(45) Aspects of Demand for Experience Goods www. netflixprize. com 1: D - 38(45) Aspects of Demand for Experience Goods

Why Do We Have the Academy Awards? http: //wallethub. com/blog/economics-of-oscar-season/2124/ 1: D - 39(45) Why Do We Have the Academy Awards? http: //wallethub. com/blog/economics-of-oscar-season/2124/ 1: D - 39(45) Aspects of Demand for Experience Goods

Outside Information: IMDb 2015 Razzie Award winner 1: D - 40(45) Aspects of Demand Outside Information: IMDb 2015 Razzie Award winner 1: D - 40(45) Aspects of Demand for Experience Goods

A Theory of Justin Timberlake’s Cumulative Advantage [W]hen people tend to like what other 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. 1: D - 41(45) Aspects of Demand for Experience Goods

A Theory of Cumulative Advantage “It sold well because lots of people bought it. A Theory of Cumulative Advantage “It sold well because lots of people bought it. ” The Publisher 1: D - 42(45) Aspects of Demand for Experience Goods

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A Theory of J. K. Rowling’s Cumulative Advantage Harry Potter by J. K. Rowling. 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. 1: D - 44(45) Aspects of Demand for Experience Goods

A Music Experiment Demonstrates Cumulative Advantage Duncan Watts, Microsoft Research. 30, 000 participants rate 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 theory of cumulative advantage. (Caveat: How do we measure quality? ) 1: D - 45(45) Aspects of Demand for Experience Goods