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

[M Holmes]

Doug Pearson writes:

> 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.

What you'd need for proof is an instance where we could compare a band
with zero secondhand value witha time when there was positive secondhand
value and show that new prices were higher in the second instance when
nothing else at all had changed. For obvious reasons, those experimental
conditions can't be satisfied.

Compared to that, finding the odd couterexaple is a cinch.

> >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!

All of it except the few counterexamples. The trick is that I can't
prove it. But hey, if you want to believe that secondhand value of CD's
doesn't affect prices of new cd's then that's OK by me. We agree that
the theory applies generally I think? You believe that the music
business is an exception for particular reasons and I'm as yet unconvinced.

>
> >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.

No, but it would tell us whether or not you believe this effect would
occur *at all* in the music business. I've made my points about your
counterexamples and there's also the issue that I don't claim that just
because a secondhand value of a couple of quid would in general add a
few pence to the new value does not necesaarily imply that a secondhand
value of 200 quid for any particular item would add several quid to the
new value. My point is that the absence of any secondhand value would
lead to lower new prices on average but not necessarily in every
specific instance.

> >> 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.

I agree that the resale value of a movie ticket is zero after the movie
is shown.  I do not agree with the first part (sorry for being unclear)
and it's not an argument until you prove that consumers in general don't
care about the resale value.  I'd be quite interested in how you think
that might be proven though?

> So you do agree that resale value is not a significant factor in consumers'
> purchasing decisions for CD's?

No.

> >> >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.

Well that's the part where I'm ignorant. I admit I'd blithely assumed
that in general where prices were higher that led to higher royalties
for bands. If this is never true and the band gets as much royalties
for a CD that's sold at a quid, or even one given away, as it does for
one that goes for 50 quid then the whole argument is clearly moot.

Is this in fact the case? presumably then most bands try to pressure
retailers to sell CD's for as close to a penny as they can get because
the lower the price, the higher the sales and the more royalties they'd
get?

> (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.

That's a different argument and I won't automatically assume you're
right. Why do you think this would be more fair?

> 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.

The secondhand dealers are the ones who took the carrying cost of
holding the LP's whereas the band threw them out to save that carrying
cost (effectively a negative resale value).

> 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.

Why a percentage of secondhand sales if that's not how it's done on
primary sales?

I'm also leery of the ceteris paribus assumption here. If the band
gained cash from this system then someone would lose it and I doubt that
they wouldn't modify their behaviour due to that, and that could be in
some way which cut overall royalties.
>
> >> >> 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.

This is the very point on which we disagree.

> 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).

We agree except in that I see being hungry as an economic factor.

> >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.

Indeed, but this is the first disinflationary period since the 1930's
isn't it? So now both factors are present and bingo, we get a stocks
bubble a credit bubble and now after asset rotation out of stocks, a
housing bubble. Coincidence?

> 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.

That too. The Fed certainly has decided that it's better to try to keep
the bubble going that take the medicine that deflation will bring.
However, Austrian theory says that the longer you run a bubble and the
more people and debt that it involved, the worse the aftermath. I'd
contend that Greenspan has averted a recession at the cost of a depression.

> >> 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!).

Well, mold anyway.

> 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.

I just doubt this. Simply ratchet up an offer of money not to smell the
floers unil someone takes it and you have a measure of what smelling the
flowers is worth to them.

> 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.

No. If I pay more for beer than you do it doesn't necessarily mean I
enjoy it more than you do, it just means that enjoying beer is worth
more to me than enjoying beer is worth to you. There might unltimately
be a measure of subjective enjoyment (some brain activity reading
perhaps) but that's not quite the same thing.

Perhaps this is what you meant and we're actually in agreement here?

> >> 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

Economics is about choices not money. Money is merely one way in which
we measure the value to people of different choices. In that this is
about a choice, it's economics. Economics is about human behaviour when
confronted with options, it's not necessarily about money or finance.

> 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.

I see we disagree about even what economics is. If you're saying that
some choices are made without recourse to money then I agree 9though I
don't necessarily agree that it would be impossible to determine
monetary values to the individual of the various choices). I do not
agree that choices made irrespective of money are not economics.

> >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.

Agreed.

> 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.

Perhaps, though at some point a manager of a porrly performing 401K
presumably has to sell if only to stem further losses. The evidence is
indeed that they'll be less skittish than individuals. In this case that
often means they lost a lot more on bahalf of their clients and they can
now only claim to be placed for the recovery.

> 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.

I guess money borrowed isn't perceived by many as the same as money earned.

> >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.

Rents have fallen in SF though prices have risen. This kind of
"divergence" is actually very common in bubbles, particularly at the
peak phase. There was similar divergence between the Nasdaq and Dow
indices just before the bust started.


> >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?!?!?

I'm suggesting that it be considered a possibility that there were
politicians who faced with a deregulation they didn't want would do
their best to ensure that it'd be a deregulation which failed.

> "Never attribute to malice what can be
> more easily explained by stupidity."

Perhaps, but given the details of electricity deregulation, these people
were certainly geniuses at being stupid.

> (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!)

I'm against deregulation. I'm in favour of free markets.

> (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.)

Given socialism's record of providing things, it'd actually be much
better to have the non-essential things passed over to the various
mini-soviets. Unless e actually prefer people to starve or die in a
health queue.

I'm in favour of the same system that guarantees me beer guaranteeing me
food and water too.

> 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.)

PG&E went bankrupt because deregulation meant that they bought
electricity prices at the marginal cost at 24 hour spot prices (that is
they were barred from buying wholesale and from arranging contracts to
supply for say a whole winter) and there were price caps on what they
could sell on to customers. A more fucked up and less free market system
would be hard to devise without a great deal of thought and the failure
mode would be obvious to a bright six year old if explained in terms of
sweets.

> while
> the "regulated" portion (energy "retail" prices) *saved* California
> consumers and businesses from being bankrupted as badly as PG&E.

It also saved them from having electricity some of the time. If you
force a retailer to sell you something at a much lower price than he
buys it for then he has a strong interest created in creating some
downtime where he can haemorage money more slowly. I also note that the
geniuses who "saved" you then set long term contracts for bulk
electricity (the politicians wwere exempt from the laws they made
apparently) at a fixed price from PG&E and others which then turned out
to be much higher than PG&E could then buy electricity for and you guys
got screwed again. Of course they're now trying to renege on this.

> 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).

Basically you stole cash from the pensioners who had shares in PG&E.
Woops, that turns out to be the Californian state. I'll bet the
taxpayers hurt for that too.

What it was is a monumental cockup.  What it wasn't is an example of
anything like a free market any more than forcing AndyG to buy CD's
individually at whatever price the owner asked (no bulk deals and now
forward deals) and then resell them at a lower and fixed price whatever
they cost him.

> >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.

Maybe once they've tried absolutely everything else, they'll try free
markets and you'll get electricity at around the price it costs to make it.

> 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).

Exercise for the reader: you're a company selling units of X. You get to
ask all sellers of X what they'll sell it to you for. You must the pay
for all units what you'd pay for the most expensive unit you had to buy
from the bidding. You have to sell on all units at a fixed price
irrespective of what you paid.

Spot the flaw. Time allowed: 1.5 seconds.

Excercise 2: You're selling to these poor schmucks and know that if they
bid for 100 units then they'll have to pay for the first 99 units what
they pay for the 100th. Do you

A) Offer 100 units at price Y

or

B) Offer 99 units at price Y and one unit at price 3 times Y?

Time allowed: 0.5 seconds.


Jeese Doug, we're not talking Evil Geniuses here.


> 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?)

Coindidence do you suppose?

>
> >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).

Hardly. In our rigged milk markets for example, we pay farmers not to
have cows in order to cut down on the excess milk. We pay a fixed price
to farmers above the market rate and so we still get more milk than we
need. We then have to pay to refrigerate and store this milk in vast
milk lakes. Eventually we also have to pay to destroy it when there's no
room for more surplus milk. This also applies to butter, meat, etc and
is why european food prices are around triple US food prices even before
the cost of taxation for all the above is taken into account.

So for "essential" foodstuffs we pay triple the free market rate and
then some so that regulation can "save" us.

If this were done for CD's then Hawkwind could make a living not making
music as part of set-aside. AndyG could make money gaining subsidies to
sell various CD's at triple the usual cost and I could make money
providing storage for the CD's which didn't sell because of the high
prices and for destroying them when I ran out of room

Yeah, I'm sure glad they regulate essential services. I can't wait for
it to happen with CD's.

FoFP