by : Professor William Greene

Economic Foundations for Entertainment, Media, and Technology

Special Features of the Demand for Experience Goods

Understanding the Demand
for Experience Goods

* Differences between experience and “humdrum” goods
* Motivation for consumption
* Aspects of demand
* Implications for markets

Demand for a Good or Service from the Consumer’s Viewpoint

Experience Good

Utility Good

Derived Demand

Shared

Gasoline

Final Demand

Purely Internal

Shoes
Consumption of Experience Goods

* Experience vs. Utilitarian Consumption
* Experience Goods – Motivation
o Purely internal
+ Immediate utility (satisfaction)
+ Rational addiction
o Interactive and interdependent
+ Common interests – discourse
+ Accumulation of social capital

Experience Goods vs. Utility Goods

The classical theory of demand falls short when applied to markets for experience goods.

Rational Addiction

* Acquired taste (opera, renaissance art, rap music)
* Accumulated expertise – a capital stock
* This implies a decreasing demand elasticity (an addiction).

Economic Foundations for Entertainment, Media, and Technology

The Demand for Experience Goods is Strongly Influenced by Interactions of Preferences and Consumption

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

Theater Lion King, TONY, Rent, Blue Man Group, 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

Red Sox, NASCAR, Giants, Olympics,

Gambling Full House Blackjack Point Spread

TV Seinfeld, Jay Leno, Survivor, American Idol, You’re Fired, Olsen Twins,
CNN, History Channel

Politics (You name it)

Amusement Sky Diving Roller coaster Bungee jump

Media Time, Slate, People, Scientific American, The Economist, NYT, YouTube

Music Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem,
VMA, Dire Straits, Billy Joel, Bonnie Raitt, Fleetwood Mac, Music Choice

Gadgets iPod, iPhone, Blackberry, Guitar Hero

Social Capital Stock

Art

Opera

Movies

Theater

Books

Sports Yours?

Gambling

TV

Amusement

Media

Music

Any Others?

The Social Capital Stock

* Functions it serves in the community
* Aspects – It is similar to other capital stocks
o Maintenance
o Depreciation
o Investment
* Implications for demand: A motivation for consumption.

TIVO Capital

TiVo has made me realize that “pulling the plug” rather than recording shows separates the TV boycotter from the rest of society. My TiVo allows me to contribute to conversations revolving around TV rather than silently observing them.

Wal Mart and Social Capital

* Increase consumption of “humdrum goods” with less external connectedness
* Reduce connection to the community by lowering viability of small “local” businesses
* (Unfortunately, empirical data do not support the hypothesis.)

Public Choice (2009) 138: 109–136

Does Wal-Mart reduce social capital?

Art Carden · Charles Courtemanche · Jeremy Meiners

Interdependent Demands

* Bandwagon effect
* d(i) = f [price, other prices, Income, ?d(j)]
* Amount demanded depends on the amount others (are

known to) have purchased

* Applications
o Bestsellers (books, music, movies)
o Movies
o Electronic innovations
o This year’s hot toy
o Others?

Bandwagons

Elasticity of demand increases as sales increase

Demand shifts outward as buyers see aggregate sales rise.

Implication 1: Lowering the price brings large benefits.

Implication 2: Advertising to increase demand is likely to be very effective.

Extreme Case: Concerts

* ?i d(i) = ?i d(i)[price, other prices, Income,D]

D = total demanded (observed by the consumer)

* Total demand depends on observed total demand
* Effect can produce positive relation between price and quantity. (Note, not a “demand curve.”)
* For the concert, MC = 0 (or close to it)
* End result: Profit = revenue maximization may occur with excess demand (fans outside the facility)

Concert Pricing

Without the fixed capacity, the revenue maximizing price would be somewhere in here, where demand elasticity equals -1.

With fixed capacity (supply, S), this is the revenue (profit) maximizing price. There is excess demand – fans outside pumping up demand for the next concert.

Professor William Greene

Economic Foundations for Entertainment, Media, and Technology

Special Features of the Demand for Experience Goods

Understanding the Demand
for Experience Goods

* Differences between experience and “humdrum” goods
* Motivation for consumption
* Aspects of demand
* Implications for markets

Demand for a Good or Service from the Consumer’s Viewpoint

Experience Good

Utility Good

Derived Demand

Shared

Gasoline

Final Demand

Purely Internal

Shoes

Consumption of Experience Goods

* Experience vs. Utilitarian Consumption
* Experience Goods – Motivation
o Purely internal
+ Immediate utility (satisfaction)
+ Rational addiction
o Interactive and interdependent
+ Common interests – discourse
+ Accumulation of social capital

Experience Goods vs. Utility Goods

The classical theory of demand falls short when applied to markets for experience goods.

Rational Addiction

* Acquired taste (opera, renaissance art, rap music)
* Accumulated expertise – a capital stock
* This implies a decreasing demand elasticity (an addiction).

Economic Foundations for Entertainment, Media, and Technology

The Demand for Experience Goods is Strongly Influenced by Interactions of Preferences and Consumption

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

Theater Lion King, TONY, Rent, Blue Man Group, 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

Red Sox, NASCAR, Giants, Olympics,

Gambling Full House Blackjack Point Spread

TV Seinfeld, Jay Leno, Survivor, American Idol, You’re Fired, Olsen Twins,
CNN, History Channel

Politics (You name it)

Amusement Sky Diving Roller coaster Bungee jump

Media Time, Slate, People, Scientific American, The Economist, NYT, YouTube

Music Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem,
VMA, Dire Straits, Billy Joel, Bonnie Raitt, Fleetwood Mac, Music Choice

Gadgets iPod, iPhone, Blackberry, Guitar Hero

Social Capital Stock

Art

Opera

Movies

Theater

Books

Sports Yours?

Gambling

TV

Amusement

Media

Music

Any Others?

The Social Capital Stock

* Functions it serves in the community
* Aspects – It is similar to other capital stocks
o Maintenance
o Depreciation
o Investment
* Implications for demand: A motivation for consumption.

TIVO Capital

TiVo has made me realize that “pulling the plug” rather than recording shows separates the TV boycotter from the rest of society. My TiVo allows me to contribute to conversations revolving around TV rather than silently observing them.

Wal Mart and Social Capital

* Increase consumption of “humdrum goods” with less external connectedness
* Reduce connection to the community by lowering viability of small “local” businesses
* (Unfortunately, empirical data do not support the hypothesis.)

Public Choice (2009) 138: 109–136

Does Wal-Mart reduce social capital?

Art Carden · Charles Courtemanche · Jeremy Meiners

Interdependent Demands

* Bandwagon effect
* d(i) = f [price, other prices, Income, ?d(j)]
* Amount demanded depends on the amount others (are

known to) have purchased

* Applications
o Bestsellers (books, music, movies)
o Movies
o Electronic innovations
o This year’s hot toy
o Others?

Bandwagons

Elasticity of demand increases as sales increase

Demand shifts outward as buyers see aggregate sales rise.

Implication 1: Lowering the price brings large benefits.

Implication 2: Advertising to increase demand is likely to be very effective.

Extreme Case: Concerts

* ?i d(i) = ?i d(i)[price, other prices, Income,D]

D = total demanded (observed by the consumer)

* Total demand depends on observed total demand
* Effect can produce positive relation between price and quantity. (Note, not a “demand curve.”)
* For the concert, MC = 0 (or close to it)
* End result: Profit = revenue maximization may occur with excess demand (fans outside the facility)

Concert Pricing

Without the fixed capacity, the revenue maximizing price would be somewhere in here, where demand elasticity equals -1.

With fixed capacity (supply, S), this is the revenue (profit) maximizing price. There is excess demand – fans outside pumping up demand for the next concert.

Popularity: 22% [?]

Tags: Hardware, IPhone, Media, Set-Top Boxes, YouTube