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Fixed costs is a critical idea in the economics of media.

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Show 4 Answers (Answer provided by Alex Tabarrok)
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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.

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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.

Thanks. The context of my question is the digital music industry, where as far as I understand it, you have no costs of diversity due to zero marginal costs of suppliers and even, as I argue in my thesis, in many cases, no costs of production at all. My argument is that artists produce and distribute at costs that are lower than the utility they gain through production (procedural utility or non-monetary rewards of artistic activities. I read your very inspiring avant-garde theory article). The resulting increased diversity should have positive effects only, shouldn't it? At least regarding the arguments of you above. However, I am thinking whether increasing search costs due to the vast amount of new works rushing to the market combined with the fact that information goods require partly advanced consumption in order to evaluate quality, may decrease total welfare. I haven't found an article about search cots and "too many products", though.

In this context I also thought about applying Adler's Lemons model to this situation, where suppliers of good quality music may leave the market because consumers cannot "see the quality immediately" and therefore have to rely on prices as quality signals. They end up assuming average quality (and prices), and these prices might be too low for high quality suppliers (the suppliers, where production costs exceed their non-monetary compensation). This might crowd out good quality suppliers. The problem is that prices are not a good quality signal in the music industry or at least not used as such.

Sorry for getting a bit off topic, but I thought I share my thoughts here as it seems relevant. Thanks again.

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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?)

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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 :)

Adorno was never far from my mind during many of the videos in this course. I think you're onto something as are Cowen & Tabarrok wherein market forces together with evolving technology will lead to an era of "mass specialization" that is being touted by 3-D printer enthusiasts (and the companies that make them) But the idea that: if a producer of media content could perfectly price discriminate, that output will be exactly the same as if price was set equal to marginal cost — still confounds me. Because there is a pretty good likelihood that the Internet will allow producers to get really close to perfect price discrimination (provided that nation-states can't regulate it too much), but it appears that while this is happening, the amount of output is increasing. It's this very increase that makes marketing costs high and SEO so important. Am I missing something? In an era of mass customization, wouldn't price-as-information get better (and therefore closer to perfect discrimination) while at the same time output _increases_? Pariser's "filter bubble" may be one of the biggest impediments to this evolution, but I don't think it can stop it.
There must be some third factor that I'm not seeing. But what?

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Show 1 Answer (Answer provided by Alex Tabarrok)
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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.

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Show 1 Answer (Answer provided by Roman Hardgrave)
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Mick - we fixed this. Thanks.

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