OFF: consumer economics (was: Hawkwind MP3's)

[Doug Pearson]

Mike, your economic theory is (nearly) impeccable; unfortunately, the
theory you present is not reflected in reality.  Let me start with some
examples ...

Shortly after the CD format was introduced, EMI Japan released a CD version
of the Beatles' 'Abbey Road', that was withdrawn a couple years before EMI
reissued the complete Beatles back catalog worldwide.  For those couple of
years, the Japanese 'Abbey Road' CD changed hands on the secondhand market
for around $200.  According to your argument, this high secondhand price
would be reflected in a higher sale price for the reissued 'Abbey Road'.
However, the 'Abbey Road' CD has always sold for exactly the same price as
the rest of the Beatles back catalog, which never had such a high
secondhand price.

OK, let's say you reject that example on the grounds that only one CD from
the Beatles' back catalog was on the secondhand market, period, so you
can't compare it to the other CD's in their back catalog.  Take David
Bowie's back catalog, originally released on CD by RCA shortly before their
contract with Bowie expired.  As soon as the contract expired, the CD's
were deleted, and only available secondhand.  Again, they fetched higher-
than-average CD prices, although more in the $25-$40 range than the $200
range.  The most popular titles ('Ziggy Stardust', for instance) commanded
closer to $40-$50, while less-popular titles (like 'Lodger') would only
sell for $15-$25.  According to your theory, reissues of the former would
sell for more than reissues of the latter.  Yet, when Rykodisc revamped the
Bowie catalog a few years later, all the titles sold for the same price.
(Now, I'm sure that Bowie *has* subsequently received more royalties from
sales of 'Ziggy' than sales of 'Lodger', but that's because 'Ziggy' is a
more popular album that has sold more copies, not because it sold for more
secondhand when it was out of print.)

And it will be the same with Hawkwind when (if?) 'Warrior'
through 'Hawklords' are reissued.  I haven't been following eBay THAT
closely, but it seems that 'Hawklords' commands a higher secondhand price
than 'Quark', owing, I would assume, to the rarity of the former (it
probably sold fewer copies, plus there was only one pressing, by Virgin,
wheras 'Quark' was available from both Virgin and Griffin).  Does this mean
that EMI (or whoever) is going to charge more for 'Hawklords'
than 'Quark'?  Of course not!

So even though your theory is *logical*, the evidence shows that it is not
accurate, and for very good reasons ...

On Tue, 1 Apr 2003 11:39:44 +0100, M Holmes <fofp at HOLYROOD.ED.AC.UK> wrote:
>Doug Pearson writes:
>> This explains why some secondhand CD's cost more than others, but it
>> doesn't explain how, as you say, "if the band are on a percentage royalty
>> then a healthy secondhand market does add to their income".  I think THAT
>> is the statement that Jon is confused about - I certainly am!
>
>OK, suppose the very second you bought any CD that its secondhand value
>went to zero price. That is that there was no source through which you
>could obtain any money for resale of the item. The theory goes that the
>effect would be that the maximum price you would be willing to pay for
>the new item would drop to some extent. Basically people are willing to
>pay a certain amount of notional rent on an item plus whatever they
>estimate it's worth on resale. Therefore if an item has some resale
>value then the price they're willing to pay for new rises.

This is true only under the assumption that CD buyers are, indeed, taking
into account the resale value of a CD when they buy one, whether new or
used (reasoning flaw #1).  The reality is, consumers care no more about the
resale value of CD's than they do the resale value of a restaurant meal or
a movie ticket or a foreign vacation (all three of which are, of course,
zero).  Economic theories that apply to automobile or home buying don't
necessarily apply to CD purchases.  (See below for more on this.)

>To the extent
>that this raises the royalty of the band and to the extent that
>competition permits retailers to reach towards this price, the royalty
>to the band increases.

This isn't the way the music business works (reasoning flaw #2).  Royalties
are not based on retail prices - a band receives the same royalty for
copies of the same CD title, whether it has a $14 price tag on it or a $16
price tag.  If on a percentage royalty, bands receive a percentage of what
the *label* (manufacturer) takes in, not what retailers take in (as Andy G
states in his message).

>Further than that, I guess you'll have to take it up with the theorists.
>It makes sense to me, but then I like to read about economics so my
>mileage might clearly vary.

I don't doubt that these theories hold true for some markets, but they
don't hold true for secondhand CD's and record label royalty rates.  Like I
said, the theory is logical and makes sense to me (thanks for the detailed
explanation, sometimes I'm a bit slow), but the reality is contrary to the
theory in this case.

>> The statement doesn't make any sense to me, since bands don't get any
>> royalty percentages from secondhand sales.
>
>Precisely so, but this doesn't mean that the secondhand market doesn't
>lead to income for the band.

I think that, at best, a secondhand market can be an *indicator* of
potential future income to a band.  I can certainly see that correlation,
but I don't see any direct causality (see the Bowie example above).

>> If anything, it seems to me
>> that a healthy secondhand market would *detract* from a band's income,
>> since a band's fans have a finite amount of funds to spend on the band's
>> releases.
>
>People only have a finite amount of funds to spend on anything. What
>retailers and advertisers try to do is change their preferences as to
>what they'll spend those funds on. Sure, someone might buy two
>secondhand CD's instead of a new one, and the band might have gained
>more from the new sale. However someone who might not pay full price
>might buy secondhand and thus raise the price of the new sale for the
>next guy.

Huh?  This doesn't sit well with basic economic theory.  If someone has
bought secondhand CD's in lieu of new ones, that's an indication of
*decreased supply* of secondhand CD's (theoretically leading to higher
prices for those), but there's no change to either supply or demand of new
CD's (if anything, the demand for new CD's is decreased, which is supposed
to lead to lower, not higher, prices).

>> Just as you describe "basic piracy", secondhand sales do not
>> help a band economically "unless it serves to bring new buyers into the
>> process"
>
>I disagree with this on the basis of the above argument.

And I've pointed two significant flaws in the above argument (and cited
examples that run counter to it) ...

>> I wish I could cite actual papers, but some of the
>> most interesting recent findings in economics have been studies showing
>> that consumers (including consumers of stocks & securities) do *not*
>> behave in the "rational" manner that the current supposed laws of
>> economics were presumed to dictate.
>
>I've no argument with that. Nobody however is suggesting that consumers
>are irrational either.

It depends on what you mean by "irrational".  If by that, you mean, "acting
in a random, unpredictable, and unquantifiable manner that cannot be
understood", I agree with you completely; there certainly are reasons to
consumers' behavior (it's just that I believe that reasoning is better
understood by the science of behavioral psychology than by the science of
economics).  However, if you mean, "acting contrary to their own economic
best interests", I'd strongly disagree!  One only needs to look at consumer
debt levels (credit card balances) in the USA to see that many (most?)
consumers do not act in their best economic self-interest.

>When consumers behave other than theory predicts
>then that means to most economists that there are some interesting
>factors that the theory is missing.

Yes, exactly.  In this case, what's missing is an accurate explanation of
consumer behavior, which I believe is best explained in mostly non-economic
terms.

>The trick about economics is that it's about people's *real* preferences
>rather than what they might claim to an opinion pollster or do in a vote
>that costs them nothing because they'll get it back again at the next
>election.

Right.  The catch is that real peoples' real economic preferences are
mostly based on non-economic reasons (buying a vaccum cleaner because your
carpet's dirty isn't an economic reason, buying a Barry White CD because
you think it will get your next date "in the mood" isn't an economic
reason).  Most people don't buy CD's because they're an investment (the
economic reason), they buy them because they want to hear the music (the
behavioral psychology reason).

>When people have to pass over the magic chits in the knowledge
>that they'll never get them back to spend on the other option, there's
>no room to lie. What they buy reveals what they actually want and what
>precisely they're prepared to sacrifice as an option to get it.

Yes and no ... consumer purchases are definitely a good indicator of what
people "really want", but the prevalence of consumer credit does give "room
to lie" in that it allows consumers to spend more than they actually have,
therefore, in effect, casting more votes than they have.

>In that
>people lie routinely about damn nnear everything else, I think we should
>look at the poor economists' crystal balls as half full, and
>impressively so, rather than half empty.

I'd concur that economic predictions tend to be about as accurate as
weather forcasts (both are sciences in which not all of the relavent
variables are yet fully understood or even known ... just like behavioral
psychology), which are frequently correct.  But attempting to use economic
theory to make claims counter to reality does not inspire my confidence in
academic economists (somehow, I have a feeling that if California's
legislators had applied the same rigorous challenge to the economic claims
made by energy companies' lobbyists a few years ago that I'm applying to
yours, the state wouldn't have gotten itself into the deregulatory mess
that it did).  The economic theories that (accurately) apply to the sale of
milk are not the same as those that apply to the sale of used/new CD's, or
houses, or automobiles, or sporting event tickets - they're all similar in
some ways, but radically different in others.

And I'll certainly concur that there is some degree of correlation between
a healthy resale/secondhand market, and an artist's "new product" sales,
but those are both effects of the same cause, not an independent cause-and-
effect.

Damn!  Fascinating discussion.  Too bad we didn't get to go over all this
on friday over pints.  That would be much more fun than typing ...

    -Doug (who knows even less about behavioral psychology than he does
about economic theory, but at least knows a thing or two about the music
biz, although Andy G probably knows much more!)
     jasret at mindspring.com