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Home | Library | Postmarket Effects of Intellectual Monopoly

Postmarket Effects of Intellectual Monopoly

December 20, 2011

Tags Media and CultureValue and Exchange

I readily admit that I am a sucker for glam (or hair) metal to supplement my voluminous consumption of heavy metal. Unfortunately, the heyday of glam metal is long gone and what remains of this proud musical genre is the occasional but temporary reunion of long-since-retired band members for another last gig or tour. While the genre saw something of a revival (or nostalgia) in the past decade, whatever was accomplished is far from the good old days.

Yet this is not the impression one gets from visiting online stores such as Amazon.com. I recently did so in a quest to increase my collection of glam-metal albums on my hard drive, and what I found was a strange phenomenon: many of the great old albums sell at very high prices. Not only that, but they sell at substantially higher prices if one chooses to download the files than if one orders the physical CDs.

For instance, Warrant's well-known album Dirty Rotten Filthy Stinking Rich (1984), with smash hits like "Heaven," sells for $10.99 for download and $8.99 for CD. And Skid Row's self-entitled album (1989), with a bunch of smash hits including "18 and Life" and "I Remember You," costs $9.99 to download and $5.86 for the CD — and the CD comes with a $1.00 credit for future music downloads! These are only a couple of examples, but clicking through Amazon's website reveals plenty more. In fact, this seems to be a pretty "normal" pricing scheme.

Of course, as Austrians we realize that the cost of production means nothing for the price at which products are offered to consumers. It is the other way around: the value to consumers decides the possible prices at which entrepreneurs can sell products — and this in turn decides what costs can be assumed in order to produce them. So maybe consumers value MP3 downloads much higher than having the physical CD delivered (even though they can instantly rip the CD). And to producers, the cost of producing the CDs is sunk and should mean little to nothing to their pricing strategies. What does matter, however, is the cost of storage, which is pretty much nothing for downloadable music.

So perhaps the pricing strategies are not as far off as they seem?

No. Comparing the prices of music produced in the 1980s and early 1990s with more recent music reveals a pricing mystery. Take the music by a modern phenomenon like Lady Gaga as an example. Physical Lady Gaga CDs sell for about as much as the same music downloadable. Sometimes the CDs are a little more costly. And a downloadable Lady Gaga album generally sells for as much as a downloadable Warrant or Skid Row album.

What is wrong with this picture? It is hardly the case that there is collector's value to purchasing a Warrant CD (which by the way is remastered — it was originally released on vinyl!) as may be the case for vintage wine or old automobiles. (And I refuse to think that Lady Gaga is somehow better music than glam rock — that's just a preposterous thought!)

There is, I believe, a fundamental error in making this comparison. We are treating postmarket sales of Warrant and Skid Row albums as if they are substitutes for the newly produced easy pop of Lady Gaga. But the fact is that they are hardly substitutes, even if we disregard that they are different types of music.

New music competes with new music. The record companies aim to make their signed musicians the next superstars and the songs from their recent album the next songs to top the charts. This is where the money (and fame) is. Nobody pushes old hits as a means to make truckloads of money; either old music made money or it didn't, but it will not now. Realizing this, we see that Lady Gaga's music in no way competes in the same market as Warrant or Skid Row.

Rather, the market for a band like Skid Row is but postmarket sales long after their commercial success has faded. Even considering the so-called revival around the turn of the millennium, what remains in terms of sales of glam-metal albums is limited to old fans (like me) who wish to upgrade or replace worn-out albums, or to the very few new fans who (re)discover the genre. In this sense, glam-metal albums sell in much the same way as spare parts for "classic" automobile makes and models — not as automobiles.

The reason downloadable glam metal is so much more expensive than the physical CDs simply has nothing to do with market forces. The fact that downloadable music costs about the same, no matter how old or how obscure, makes this pretty clear. Digital-music pricing is standardized and immune to market demand, just as store prices were in the Soviet Union. And the reason is that there is only one supplier through a forced monopoly.

This fact is even more obvious if we consider that those listening to the latest fads in music do not see different artists as substitutes. Nobody who really likes Lady Gaga's latest hit song goes to the store and picks up an album with similar music by a different artist. But this is precisely what does happen with postmarket sales, where new fans of glam metal want more of glam metal, not necessarily a specific song or album — or even artist. I am a perfect example: I am looking for more glam metal for my collection, not a specific album.

The record company that signed Lady Gaga has an obvious competitive advantage and a better market position to profit from specific demand. Whether there is "protection" through legal monopoly for Lady Gaga's music is of little import: it still sells, and it sells for much higher prices than similar music that is not Lady Gaga. Simple market contracts are sufficient.

But for glam metal, the situation is not at all the same. The market is mature, so there are a sufficient number of substitutes for whoever enters the market as a consumer. It usually does not matter if the album one picks up is Van Halen, Def Leppard, Warrant, Poison, Cinderella, Dokken, Whitesnake, or Skid Row. Today's glam-metal consumer is commonly looking for "anything" in the genre or simply "anything I do not already have."

For most products, we would expect more competition and more similar products in mature markets. And with the eyes of music consumers in the second decade of the 2000s, most glam-metal albums sound pretty much the same (even though they are not). And the market has worked as we would expect — record labels took on many more glam-metal bands after the early success of the genre, and there was a wave of enormous production (and sales) of glam rock in the 1980s. Supply increased to meet demand. Prices eventually subsided. And secondary markets (for "preowned" CDs) emerged.

But not for downloads, even though the cost of producing another download is indistinguishable from zero. The same is true, but to a lesser extent, for the physical albums — they are not as cheap as they probably should be. And the reason for this is the lack of competition between labels in the postmarket for music: they have no incentive to lower prices because there is very little cost to stockpiling the products (or keeping them on the hard drive). Since consumers tend not to differentiate between the products, the only way to compete is price (the common case in mature markets).

But it is not necessary to lower the price, since there are only a few labels and they are legally protected from competition. Had the music industry been subjected to regular market contracts instead of (lobbied-for) protective legislation, they would have competed for whatever sales there still are in the glam-metal market. After all, if consumers are not looking for a specific artist, then price will decide what they end up purchasing. Lower prices would mean more sales, and the business would be tempted to sell as much as possible as fast as possible.

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The reason for this is the nature of the market contract. Very few artists would give up the rights to their music for eternity; a renewable short-term contract may be better prefame for both artists and labels. But as soon as an artist becomes successful and famous, the artist should prefer a short-term contract — and the label a long-term contract. Regardless of the length of contract eventually signed at that point, the label would have an incentive to sell at lower prices as demand drops — and maximize sales before the contract ends. And so would the artist, because record sales increase sales for complementary apparel (and wigs) — and jack up demand for future albums.

The reason downloadable music is so expensive is that there is simply no cost to holding it — and no threat of competition due to legal monopoly. And the reason the CDs are cheaper, but probably not cheap enough, is that (compared to downloadable music) there is some cost to storage. In both cases, the reason this glam-metal fan doesn't get his hands on more of those fantastic old albums is that market forces do not set the prices. They are politically fixed, and the record labels are subsidized by the taxpayers to sell music at higher than the market clearing price.


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