Undercover Economist: The laws of Rockonomics

20th July, 2013

Three lessons on money and market forces derived from the music business

Economics and rock ’n’ roll don’t necessarily go hand in hand, but there’s something in the air this summer: my attention has been called to not one but three separate economics lessons from the music business.

Lesson one comes from the front line: according to NPR’s economics podcast Planet Money, the rap/country/rock crossover artist Kid Rock has been going to war against ticket touts.

The existence of touts has long been a puzzle for microeconomists: the entire tout business model of buying underpriced tickets and reselling them for a fat mark-up would appear to depend on irrationally low ticket pricing. Why don’t rock stars simply charge more?

There are a number of possible explanations but for Kid Rock, it’s simple: he produces blue-collar music and it doesn’t feel right to be charging a premium price. Fans might be willing to pay hundreds of dollars for a concert ticket, but would resent it if Kid Rock himself tried to charge that much.

Kid Rock’s four-part solution: flood the market with lots of shows to make sure that even at the low price of $20, there are still tickets available; have a small number of super-expensive tickets near the front; allocate the very best seats by lottery to people who bought the cheap tickets; and enforce it all with paperless tickets and an ID check to prevent resale. According to Planet Money, it’s all working: concerts are pretty full but you can still buy $20 tickets from official sources.

Lesson two is about globalisation. A new article in The Economic Journal from Fernando Ferreira and Joel Waldfogel asks whether in a world of MTV and YouTube, national musical cultures are being crushed by American imports. Ferreira and Waldfogel have assembled more than a million data points covering chart hits in 22 countries, in some cases going back to 1960. In practice this covers pretty much the entire global music market, and the data are used to estimate the value of music sales.

At first glance, worries about the cultural dominance of the US seem justified: US artists are responsible for 60 per cent of world music sales. But US artists were responsible for 80 per cent of world music sales in the early 1960s before dramatically losing market share to the British. (We are now, alas, in sharp decline.)

In the early 1980s, less than 50 per cent of music sales were by domestic artists – that is, French artists selling in France, or Brazilian artists selling in Brazil. By 2007 that figure was around two-thirds. Domestically produced music is having a renaissance – proof that globalisation has more complex effects than we tend to assume.

The final rockonomics lesson of the summer comes from Alan Krueger, the chairman of Barack Obama’s Council of Economic Advisers. In a recent speech Professor Krueger sought to draw a parallel between the music industry and the threat to the American middle class. The core of his argument: in music as in life, the rich are getting richer while the rest are being left behind.

Krueger argued that this is partly the result of technological change that allows a winner-takes-all distribution of rewards. He also argued, quite convincingly, that the difference between being one of these ever-wealthier winners and an also-ran is often a matter of luck.

But what to do? Krueger was keen to applaud President Obama’s priorities as being an antidote: reforming healthcare, encouraging pre-school education, revitalising distressed communities, increasing the minimum wage and raising a stink about high pay for bankers and chief executives. I agree with Krueger about the problems but I wonder whether such approaches will do much to solve them.

It isn’t easy to harness market forces, reward the middle class and make a profit into the bargain. Perhaps Professor Krueger should ask Kid Rock for advice.

Also published at ft.com.

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