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Hello from Sydney and thank you very much for your educational services!
My question addresses the "too much product diversity"-notion. I don't really understand how you can have too much product diversity. As long as firms produce the products (which implies they make a profit), then any additional differentiated product should increase consumer surplus because it increases the probability to meet consumer preferences. For example, the more songs exist, the higher the likelihood that I find my "perfect" song. I can't image a situation where a market has too much diversity...
think of there being two reasons for new products. One is to satisfy consumers, the other is to drain away demand from suppliers. If the second effect is strong enough, that is a negative-sum game and there can, relative to a first-best optimum, be too many new products in the market. As you will note from the video, I am not myself extremely impressed with the relevance of this argument, but in the math of the model it can work out that way.
This is a good question. Let me add to what Tyler wrote. If diversity had zero costs then clearly more diversity is not a problem but suppose that there are economies of scale. Thus, we can have two products with low quantities each and high prices or one product with high quantities and low prices. Depending on how much value consumers place on satisfying their preferences versus low prices either option could be optimal. The question, however, is whether the market will choose between these two options in the way that is optimal and in some situations the answer is no. See also the video on spatial models.
Although I am not certain of the economics behind it, your follow-up post gives a glimpse as to why Search Engine Optimization (SEO) has become such a buzzword in different media content industries. If one of the larger fixed costs of media marketing is making audiences aware of the existence (and quality) of your content, and more and more individuals turn to search engine algorithms to find content -- then the ability to get your content sorted from the "too much product diversity" becomes critical. As you'd written:
> because consumers cannot "see the quality immediately" and therefore have to rely on prices as quality signals.
Price as a quality signal would only work if the ultimate consumer can pick your content out of an incredibly big and complex market. Does this mean that the cost of marketing will continue to rise inevitably? So my real question is: does the cost of marketing for new content start to drop?
(...or will we be stuck with comic book franchises and sequels and prequels in perpetuity?)
Hi William, I definitely agree. Search algorithms, recommendation system, collaborative filters, also charts and reviews are becoming the bottleneck determining whether we, the consumers, can enjoy the newly arisen diversity explosion of creative works or not. This is a great field of research. Especially, the phenomenon of the "filter bubble" (http://www.ted.com/talks/eli_pariser_beware_online_filter_bubbles.html). Also, I wrote a brief blog entry to keep the idea of, what I call "Pandola" (Pandora + Payola) http://artist-entrepreneurship.blogspot.com.au/
Regarding the costs of marketing new content in this environment: I think the decisive difference to the old paradigm is that one has an advantage in addressing extreme niches. It's easier to find and address very specific customers. Addressing the mainstream becomes more and more difficult and inefficient. Due to the fact that you can operate on an extremely small scale, niches also become profitable. Thus, the costs of marketing niche content drops but costs to market mainstream content rise.
I believe that this is the very much appreciated countermovement to Adorno's "manufacturing of popular culture" and instead of his proposed "loss of individuality" we now have the chance to outlive individuality like never before. That sounds a bit dramatic :)
I have a question related to your paper "An Economic Theory of Avant-Garde and Popular Art."
You hypothesize that capital intensity and reproducibility of artwork help explain the extent to which various art forms tend to be high or low brow. Movies, with high capital costs and high reproducibility, have much to gain from maximizing audience, so they tend to be low brow. Painters on the other hand, have low capital costs and their work isn't exactly reproducible, leading them to focus on a more narrow audience of critics who share their artistic taste.
I wonder how this line of thinking might help to explain the recent trend in television toward work that is more critically praised. Many have said that we have recently been living through a "Golden Age" [http://www.grantland.com/story/_/id/9933512/the-sopranos-walking-dead-en... of television. Even if one still thinks that most TV is bad, it seems hard to deny that we now enjoy more high brow television than ever.
How might your thinking explain this change?
Good analysis and question. I agree TV has become more high brown and I think our theory explains this. Notice that the number of channels has increased dramatically over the past four decades from about 3 to say 300 or more. That's another way of saying fixed costs have fallen. Each channel today receives a smaller share of the audience and to get that niche audience they have to appeal to people with particular tastes including some people with high brow tastes!
Another related factor is that TV used to rely primarily on advertising so you really wanted as many eyeballs as possible and that also pushed producers to middle of the road tastes. But a lot more TV today relies on subscription, i.e. HBO. Showtime, Max etc and on the subscription model you can do ok with fewer eyeballs if people are willing to pay directly and that also increases the willingness to cater to particular tastes, including high brow tastes. Notice that HBO has led with high brow programming, although others have followed.
Greetings from New York City! At the end of one of the videos (in reference to Ronald Coase), you mentioned a course titled "How to Think Like an Economist." Is this a video course on MRUniversity? Just wondering where I can watch it, as I don't see it listed on this site. Thanks!
- Economic Freedom