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

[Doug Pearson]

PRACTICE (as in, practices of the music biz) ...

On Thu, 3 Apr 2003 11:53:59 +0100, M Holmes <fofp at HOLYROOD.ED.AC.UK> wrote:
>Doug Pearson writes:
>> 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 version of the Beatles' 'Abbey Road', that was withdrawn a couple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'.
>
>Nope, that simply shows that for other reasons, the retailers weren't
>willing to either release the item in the quantities demanded,

The unavailability of Beatles' CD's had NOTHING to do with retailer
decisions.  It had everything to do with the fact that EMI & the band were
suing each other over royalties.  And the fact that the Beatles *were* able
to subsequently negotiate a higher CD royalty rate than any other artist
had everything to do with the fact that they were the most popular rock
band ever, and nothing to do with the fact that their sole out-of-print CD
sold for $200 secondhand.

>or to
>charge the price the market would bear for the limited release.

Uh, the retailers DID charge the price the market would bear for the
limited release, which was around $30 (normal price for Japanese CD's at
the time) while it was "in print", and $200 after it went out of print.
And then, when the worlwide reissues came out, they again charged the price
the market would bear (the standard $15-$20 for new CD's).

>Once again: there are *OTHER* factors in pricing. Secondhand value is
>simply one more effect.

If secondhand value really *is* an effect, then what were the *other*
factors which affected the Beatles' CD's *other than* Abbey Road in such a
way the effects of the higher secondhand value were *exactly*
counterbalanced?

>> 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.)
>
>It's also a non-perfect market. Secondhand value is *estimated*
>conciously or unconciously by buyers of new product. They may not know
>how rare a particular product will turn out to be, or indeed how
>popular. Thus they may estimate the secondhand value as more or less
>"the normal amount plus maybe a little extra because it's Bowie".

It's easier to estimate secondhand value when you have a larger statistical
group to work with, so it's easier to estimate the value for popular
artists (such as Bowie) than for obscure ones (which I mentioned in a
previous message regarding bluebooks - those tend to be more likely to be
inaccurate for more obscure artists, while pretty standard/accurate for
Beatles/Dylan/Stones/Elvis/etc.).  The reason I gave for the difference in
secondhand prices between the various Bowie albums is a sound one, and that
difference in secondhand prices clearly had no effect on the subsequent
Bowie reissues.

>> So even though your theory is *logical*, the evidence shows that it is
>> not accurate, and for very good reasons ...
>
>Sorry, but the evidence indicates that it's quite accurate.

What evidence?  Can you cite some examples, as I have above?  Where it can
be conclusively shown that high secondhand prices directly caused higher
royalty payments further down the road?  Please name a band/artist and
album title, as I have.

>It also
>indicates that these aren't perfect information markets and that the
>theory won't be predictive in every single case.

I don't know of *any* cases (inside the music/CD business, of course) where
your theory is correctly predictive, so just give me one example where it
is!

>On *average* though,
>bands receive more royalties on new purchases because of a positive
>secondhand value than they would if people were shot if they ever sold
>secondhand and the value went zero or negative.

Hmmm ... I list several real-world examples, and the best you can come up
with is, "if people were shot if they ever sold secondhand"?  Since we
don't live in a world where people are shot for selling secondhand CD's,
there's no way to verify whether that's a true conclusion or not.

>> 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).
>
>Please show why this is a flaw.

It's a flaw because consumers *don't* take resale value of a CD into
account when they buy one, for the reason I give immediately below (which
you seem to agree with), and other reasons.

>> 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).
>
>Indeed.

So you do agree that resale value is not a significant factor in consumers'
purchasing decisions for CD's?  (It may be a significant factor for you,
although your anecdote regarding your purchase of a Hawkwind 7" on eBay
would seem to indicate otherwise, but it is a zero factor for me, and Paul
Mather seemed to indicate that it was not a factor for him, either.)

>> >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.
>
>OK, I thought I'd made it pretty clear that the argument applies only if
>the band royalties were a percantage (or vary in some other way with)
>the retail price.

Which does not EVER happen in the music business.  So this is just another
hypothetical situation.

(However, I'll add that a royalty system where bands/artists received a
percentage of retail for every CD sold, either new or secondhand, WOULD be
much more fair to the artists than the current system.  It pains me when
artists are "rediscovered", and the LP's that they threw out 20 years ago
because they couldn't give them away at the time are suddenly worth
hundreds of dollars, but the only people to profit from it are the
secondhand dealers, not the artists.  And, this system would, of course,
make Mike's claim of high secondhand prices leading to higher royalties
completely true, since royalties would be paid as a direct percentage of
secondhand sales.  But, unfortunately, the system does not work that way
right now, and I can certainly see the major issues that would make it very
difficult to implement.  It's a great Utopian-type concept, though.)

>> 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).
>
>The argument still applies wherever a higher retail price means a higher
>price for the label. Not otherwise.

Exactly.  A "higher price for the label" DOES imply "a higher retail
price", but a higher retail price DOES NOT, in any way, directly imply a
higher price for the label (at best, it's an *indicator*).  Just because A-
>B doesn't mean that B->A.  So since a higher retail price does not imply a
higher label price, your argument does not apply.

>I'm willing to entertain the possibility that you're right, but I'd need
>more evidence than a couple of examples. How about some thought
>experiments: let's say that the resale value of CD's were negative, say
>either you got charged ten times what you paid or you got shot. Do you
>think that prices would remain the same for new CD's?

In that case, we would not be living in a free market economy (since used
CD prices are "fixed"), so it would be up to the price fixers to determine
what the prices of new CD's were, and none of the "free market" arguments
we're both making here would be valid.

>> >> 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).
>
>I didn't express myself clearly enough. Someone buying secondhand CD's
>would raise the *new* price a little.

Yes, I understand that's what you're saying.  I'm saying that your
statement is contradictary to the most basic economic rules of
supply/demand.  Those state that someone buying secondhand CD's would raise
the *secondhand* price a little, and that if the new price was affected at
all, it would decrease.  I realize that there are exceptions to rules, but
I don't see any evidence of this situation being an exception.

>> >> 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've given the reasons that the examples are counter ones and pointing
>out flaws doesn't mean much without the evidence or reasoning to show
>that they are flaws.

The flaws in your argument I pointed out are:
1) At the root of your argument is the assertion that consumers of CD's
take resale value into account when purchasing CD's.  I contend that the
vast majority do not (for reasons listed above), and that the evidence (at
least anecdotal examples) supports this.  However, this one *is* tough to
prove conclusively either way (unlike #2).
2) Your argument also relies on an assumption that royalties are paid as a
percentage of the *retail* price of a CD.  Since that is not the reality of
the business (this is an absolute fact), your argument is severly
undermined, if not contradicted outright.

AND NOW FOR THE THEORY (and other stuff unrelated to the music biz) ...

>Economists would claim that consumers act only in ways that they
>*perceive* to be in their best interests.

Yes.  The tricky part is that consumers' perception of what is in their
best interest can: A) change dramatically in relatively short periods of
time (just follow those polls of what people perceive as the greatest
problem facing their nation for a few years - the results are usually what
the tv news spends the most time talking about, not the problems that
really are the greatest), and B) that perception can be altered by any
number of non-economic factors (the studies which show that people spend
more at the supermarket when they're hungry, for instance).

>As you point out, the
>prevalence of credit bubbles and other manias in history indicate that
>even whole societies can for a time have their perception considerably
>at odds with reality. For my money (heh) the Austrian school of
>economics has it taped on why this is so (essentially the theory of
>money illusion under artificially lowered interest rates). Certainly I
>am convinced that it's more than coincidence that these things almost
>always occur during periods of falling interest rates and manipulation
>of interest rates.

But, at least in the US, interest rates are subject to *constant*
manipulation by the Fed.  But I guess we've also been subject to bubbles of
one type or another the whole time, too, so it's tough to say whether
there's necessarily a correlation or not, and if so, what the causes are.
I'd be inclined to believe that the Fed's tinkering with interest rates is
a *reaction* to the bubble, rather than a cause of the bubble.

>> 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.
>
>I believe that there are no non-economic terms to pretty much everything.

And this is the main problem I have with both Marxists and Libertarian
Laissez-Faire Capitalists (a pox on both your houses!).

I think it's a cop-out to ignore the non-economic factors, because the
economic ones are much easier to quantify.  One can quantify the economic
loss of taking the time to stop to smell the flowers (based on time spent
and "potential wages lost" or something like that), but not the non-
economic enjoyment that is gained by smelling said flowers.  If you tie the
non-economic enjoyment directly to the economic loss, that would indicate
that a person with a higher salary necessarily gets more satisfaction (to
counter the greater economic loss) out of smelling the same flowers as a
person with a lower salary BECAUSE of the difference in salaries.

>> 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
>
>Of course it is! You have a scenario where you can see two choices
>(economics is about choices and only choices): keep the carpet dirty and
>live with it, or spend X on getting the tools to clean the carpet and
>forego the possibility of spending X on beer, CD's or saving up for a
>rocketship. That's pure economics.

But those are economic *consequences* of a decision made for non-economic
reasons, not economic *reasons*.  Making the choice between having a clean
carpet vs. having a dirty carpet has nothing to do with economics; it has
to do with whether or not one is a slob, since anyone who can afford to pay
for housing can certainly afford *some* sort of vaccuum (even if only from
the secondhand/thrift store).  It's the choice between buying a 12Amp
vaccuum cleaner with 30 attachments vs. buying the cheapest vaccuum in the
shop that is the decision where economics comes into play.

>> buying a Barry White CD because
>> you think it will get your next date "in the mood" isn't an economic
>> reason).
>
>Two choices: sex tonight but put up with Barry White or no sex but you
>have the cash to buy Tim Blake's new CD.

Maybe I should've said Isaac Hayes, instead of Barry White, since I enjoy
his early work as much as I enjoy Tim Blake's better works (there's a great
extended space-funk jam on side 4 the 'Shaft' soundtrack that even has some
awfully Turner-esque flute on it).  Of course, I'd never buy a *new* Isaac
Hayes CD, since he's a damned $cient0l0gist.  Again, there's a decision
made on non-economic ("moral") grounds that has economic *consequences* for
*someone else* (but not for me, I'd just pick a different CD by another
artist to buy).

>Pure economics again. Basically
>it's the question of how much sex is worth to you. If you imagine that's
>not an economic question then a quick chat with anyone who's worked in
>the sex business will quickly reeducate you.

That only shows that it's an economic issue to people who are consumers of
the products & services offered by the sex industry.  And the choice as to
whether or not to be a consumer of the sex industry can't be an economic
one, since you can download lots of pr0n on the net for free.

>> 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).
>
>Choices again. Either would be an economic reason just as paying for a
>restaurant ticket because they play the album there would be.

Choices, yes, but not a choice based on economic reasons.  If CD consumer
decisions were based on solely economic reasons, then only the items in the
dollar bin would sell.  The problem is, most of the CD's in the dollar bin
suck, and nobody wants them *no matter* how cheap they are, which is why
they're there!  The only time economics comes into it is when choosing a
title found in the dollar bin over *the same* title found in the normal-
price section.

>A good point. However, while they think there's a chance that they'll
>have to pay the money back then they're still evincing what economists
>call "revealed preference". However it is more interesting where credit
>is concerned. For example there has been some interesting discussion of
>stockmarket behaviour in recent years (basically the bubble and crash).
>It seems that when people are playing with "house money" (I.E money
>they've gained in the bubble) they're more willing to take risks with
>it. Once they lose their profit in the crash and start playing with
>their own savings again, they become much more conservative. This has
>been advanced as a reason for "capitulation" during crashes (basically
>about halfway down the slide there's a time of huge drops and investors
>leaving the market). It seems that since most people came in during the
>mid-90's, we're approaching that point now (a big mystery of this crash
>has been why there's been no period of capitulation yet). After that
>comes investor shunning of the bubble markets and the final slide to the
>bottom.

I'm sure that part of the reason for this is that a lot of the mid-90's
entries into the stock market are in mutual funds, 401k's, and the like.
I'm just hypothesizing, but I think that many middle-class people are less
likely to pull out of those than they are to sell individual shares.  That
would certainly mitigate any "capitulation", or at least slow it down.  I'm
pretty sure you're correct about the "house money" theory, although that
would seem to bolster the "behavioral psychology" argument, since there's
no real economic difference between "house money" and "seed money".  A
dollar of each is still worth exactly the same.

>This also shows in the housing bubbles.  During periods of falling
>interest rates buyers seem to price based on monthly interest repayments
>rather than consider that the actual price is all money that they'll
>have to pay back along with interest.  So where this is prevalent, where
>rates halve, prices double.

Over the last year, both interest rates *and* housing costs have come down,
at least around here, so I'm not so sure about that statement.

>> 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 problems were that these weren't anything like the free markets the
>authorities wanted to pretend them to be. If you dislike free markets
>and people press for deregulaton then it's a reasonable political
>strategy to deregulate with rules that will force failure.

Are you suggesting that California legislators *deliberately* allowed a
thoroughly-failed deregulation scheme to be implemented solely to discredit
the concept of deregulation?!?!?  "Never attribute to malice what can be
more easily explained by stupidity."  (Plus, deregulation schemes have a
way of discrediting themselves without any help; during the California
power crisis, I asked someone who would know about these things, "in what
industries has deregulation been BENEFICIAL?"  His only answers: airlines
and telecommunications!)

(Just for the record, I'm in favor of free markets for non-essential
consumer goods and luxury items - like CD's, but I am opposed to free
markets for "necessities" like food, essential and/or preventive health
care, energy ["baseline" usage], national security, etc.)  And of course,
you're correct that California energy deregulation was not a "free market";
however, it's important to note that it's the "free market" portion (sales
from energy traders to energy "retailers") that was the broken part
(bankrupting PG&E and enriching Skilling/Kenny-Boy/Fastow/etc.), while
the "regulated" portion (energy "retail" prices) *saved* California
consumers and businesses from being bankrupted as badly as PG&E.  In that
case, regulation was the "firewall" that prevented a major economic mess
from turning into an absolute disaster (i.e. one business bankrupted
instead of every business in the state bankrupted *except* that one).

>Your astute politician can then step in, reregulate to save the day

If only that were true ... California politicians (unlike, say, Dennis
Kucinich, who made a short-term economic sacrifice to ensure the city of
Cleveland's long-term economic gain by maintaining control of their public
power company) don't have the guts.  And it's a well known problem that
putting the deregulatory genie back in the bottle is far, far, more
difficult than releasing it.

>and bask in the
>adoration of the public while blaming the "free markets" that never
>existed anyway. Add in what looks like the biggest financial fraud
>conspiracy in three generations (Insul was the last of this size before
>Enron in the west) and you have a pretty heady mix. Expecting any free
>market model to work under these circumstances is like trying to shovel
>hot coals with an ice lolly.

Yep.  That's my point - the original legislators didn't investigate
the "deregulation" scheme thoroughly enough to see the flaws in it that
would allow the fraud (stupidity at work).  I believe that the energy
industry lobbyists pushing the scheme knew damn well that the "free market"
models they cited wouldn't apply to the legislation they were pushing.
It's difficult to investigate a scheme when every real-life concrete
example you cite gets shot down as irrelavent, and the economic theory
behind the scheme is based entirely on hypothetical, rather than actual,
situations.  Plus, of course, when an "authority" tells people how much
money they're going to save, they seem to be less likely to investigate the
veracity of the statement, even though it would definitely be in their best
interest to do so (once again, behavioral psychology trumps economics).
(And wasn't Insul basically responsible for most of the energy regulatory
schemes that were put in place during the great depression, in the same way
that Enron is responsible for the current set of SEC & accounting industry
reforms?)

>You're right. For some reason milk markets seem to be completely rigged
>damn near everywhere. The record companies would give their eye teeth
>for those kind of markets and Hawkwind would probably be earning
>set-aside money due to te surplus of Hawkwind CD's.

Like I said, free markets for CD's = good; free markets for essential
foodstuffs = bad (IMHO).  But yes, I think the average Soviet commisar
would be perfectly satisfied with the way the milk markets are run.  Since,
presumably, everyone else has given up reading at this point (if you've
made it this far, you must be some sort of masochist), I'll make the
obvious obnoxious joke that perhaps there *is* a government musician
subsidy (just like the farm subsidies) that we don't know about, and
they've been paying Dave for the last 5 years *not* to produce a new
Hawkwind album (and he *does* live on a farm, right?  hmmmmmmm) ...

>Yeah. It wasn't the best venue but I was pretty desperate for anyone to
>get it organised by that point. Next trip we'll organise it between
>ourselves and tell the peevers where we're going....

It's healthy for me to spend time in suburban hell every once and a while
(but that was plenty for quite some time!).  And to hear the kind of band
that most "normal" musicians in this country play in (cheesy blues-rock
Eric Clapton, Bob Seeger, CCR, etc. covers) ...

    -Doug (sorry for the length)
     jasret at mindspring.com