Music-nomics

XmarkX left me a good question yesterday, asking me how my disdain of ‘commercialised music’ sits with my neoliberal economic stance (markets rock! no?). The answer deserves its own post. I’ve actually pondered this a few times, and wrote about it last year in one of the UQ Economics Students Society’s magazine. The article itself was more about possible pricing models for online music stores, although I did outline what I thought were some of the inherent problems of the music industry. I’ve copied some relevant bits here:

…The music industry is a prime example of when asymmetric information leads to market failure. When we purchase music from the CD store, we are in fact signing an implicit contract with the record label. We pay the record label so that they may scout the best music talent that’s out there, and distribute and promote that talent, as we don’t have the time or know-how to do so ourselves. This form of business model creates huge problems involving asymmetric information. We can’t monitor how the labels are going about seeking that talent, paving the way for labels to impose over the top agency costs; and conversely, due to standardised prices, the labels do not know what consumers’ preferences are. In most other markets, prices may act as a mechanism to overcome lack of information. For example, when I recently bought my first car, I had a choice whether to purchase from licensed dealer, or a private individual listed on the ‘Trading Post’. Used cars sold by dealers are dearer than ones listed on the Trading Post because you know that a car sold by a dealer has been serviced recently, include a warranty, and will definitely be road worthy. Stereotypes aside, the dodgy, lying, scheming, used car dealers would have been driven out of the market ages ago. Prices reflect value and risk. These values and risks are clearly not evident when we purchase music, especially when the latest Australian Idol-er’s album costs the same as Powderfinger’s. Standardised prices create a major problem in that consumers are not able to gauge the value and risk associated with their purchases. This creates what economists call a ‘moral hazard’ for both the record labels and consumers, whereby both parties able to freely break the implied contract. As consumers cannot monitor the behaviour of labels, nor are the labels able to adequately gauge consumer preferences. In turn, they have applied huge agency costs and masked the real value of their products. This perpetual cycle only results in artificially higher prices, both in online and real music stores. Currently, the only form of moral hazard avoidence mechanism is peer-to-peer downloads. It was possible for consumers to avoid these large agency costs by searching for the music themselves. The record labels no longer had to act as a ‘talent scout’, as users are now able to sample what they like and don’t like, all at a tiny fraction of the cost of purchasing a CD…

You can probably trace these problems down the fact that the music industry is an oligopoly dominated the big four labels. But then again, music taste is subjective, and maybe people genuinely like listening to Crazy Frog?

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