Cultural Economics (The Economy Key Ideas) [Illustrated] 1788211618, 9781788211611

Citation preview

Cultural Economics

The Economy | Key Ideas These short primers introduce students to the core concepts, theories and models, both new and established, heterodox and mainstream, contested and accepted, used by economists and political economists to understand and explain the workings of the economy. Published Behavioural Economics Graham Mallard Bounded Rationality Graham Mallard Cultural Economics Christiane Hellmanzik Degrowth Giorgos Kallis The Gig Economy Alex de Ruyter and Martyn Brown The Informal Economy Colin C. Williams The Living Wage Donald Hirsch and Laura Valadez-​Martinez Marginalism Bert Mosselmans Productivity Michael Haynes The Resource Curse S. Mansoob Murshed

Cultural Economics Christiane Hellmanzik

© Christiane Hellmanzik 2020 This book is copyright under the Berne Convention. No reproduction without permission. All rights reserved. First published in 2020 by Agenda Publishing Agenda Publishing Limited The Core Bath Lane Newcastle Helix Newcastle upon Tyne NE4 5TF www.agendapub.com ISBN 978-​1-​78821-​161-​1 (hardcover) ISBN 978-​1-​78821-​162-​8 (paperback) British Library Cataloguing-​in-​Publication Data A catalogue record for this book is available from the British Library Typeset by Newgen Publishing UK Printed and bound in the UK by CPI Group (UK) Ltd, Croydon, CRO 4YY

Contents

Acknowledgements    1 Introducing cultural economics

vii 1

  2 Markets, prices and agents

13

  3 Society and culture: public provision and institutional aspects

27

  4 Demand for culture

43

  5 Artists, superstars and creativity

57

  6 Quality in the arts and culture

73

  7 The organization of cultural industries

87

  8 The internet’s impact on cultural sectors

101

  9 Globalization’s impact on cultural sectors

119

10 Conclusion

133

References Index

137 143

v

newgenprepdf

Acknowledgements

I would like to thank John O’Hagan, Lukas Kuld, Sara Mitchell, Martin Schmitz and Danielle Kedan for their support, guidance and the many inspiring, fun exchanges over the years; all the many others in the scientific community who inspired me as well as offered fresh perspectives during my explorations of economics and cultural economics in particular; and Jan Lordieck, Jens Kirsten and Adrian Hinse for their excellent research assistance. Moreover, I would like to thank the anonymous reviewers for their invaluable comments and suggestions and Alison Howson at Agenda Publishing for her advice, many of the examples in the book, and bearing with me and my writing process. And above all I am grateful to the loves of my life. For being there and for being just the way you are. Thanks a million to you all.

vii

1

Introducing cultural economics

By way of starting this book, let us point out the obvious: culture and economics are in many ways contradictory, if not antithetical. Is it not the mere essence of art, and culture more generally, that its beauty lies in the eye of the beholder? Its true value is hard to grasp and goes way beyond the price paid at the box office or the bookshop. When we think about the artist’s perspective, is art and, more precisely, the spark of genius that results in the Mona Lisa, Oliver Twist or “Bohemian Rhapsody” not the result of some divine inspiration that cannot possibly be subject to such banal forces as the market? How many musicians, writers or painters take great pride in their independence of the market? One might think that most of the cultural avant-​garde of the 1960s and 1970s were inspired by that very sentiment when we think of Woodstock, the Sex Pistols or Pink Floyd. On the other hand, we have the likes of Banksy and Damien Hirst, whose claim to fame, as well as their works of art, is to toy with eclipsing existing definitions of art and its market. Hirst’s Shark in a Tank sold for US$8 million in 2004 and, although graffiti and tagging are illegal, Banksy’s graffiti of a Girl with a Balloon sold for £37,000 in 2007; and, more recently, a framed version of the very same image self-​destructed by means of an in-​built shredder, at the point that it was auctioned for US$1.4 million. For both these modern artworks we might be forgiven for thinking that they are a far stretch from a Van Gogh oil painting. Similarly, with the advent of the internet many musicians have adjusted the way they produce and market their art, as evidenced by the many artists who have since been discovered on YouTube or Soundcloud. And what about George R. R. Martin, whose novels inspired the Game of Thrones television series? Surely his writing process was influenced by the market he was catering for.

1

Cultural Economics

These examples capture several mechanisms at play. One is the evolution of our definition of what constitutes culture. The other is the interaction between the artist and the audience (or consumer) via ever-​changing platforms, or what economists would simply call the market. Although I leave it to critics in the field to determine what constitutes a good musical piece or painting, cultural economists can certainly contribute to the debate on the second point by offering their tools in order to understand what they would call market outcomes, such as in the case of the graffiti artist Banksy’s success in the fine art market or the cult success of a television series such as Game of Thrones, which reached an audience way beyond the usual fantasy genre crowd. And this is where this book has its point of departure. Cultural Economics seeks to understand cultural phenomena using an economic toolbox to analyse the supply and demand for culture. To that end, economists like to use two things: models and numbers. First, we use models to describe the key dynamics between and behind demand and supply, abstracting from other factors. In this book I will use simple diagrams to illustrate these models. And, second, I refer to scientific papers which use numbers to quantify and empirically test a model’s hypothesis. As such, cultural economics is the application of concepts and methods of economics to the field of culture. The economic toolbox Economic analysis offers a way of understanding culture that makes market dynamics of cultural industries transparent and offers a means of understanding how culture is affected by the market. This pertains both to artists, as the producers of culture, and to audiences, as the consumers of culture. Figure 1.1 depicts a simple framework that will be helpful for exploring the thinking of an economist. Essentially, the market consists of the supply and demand of cultural goods and services. At a basic level, the market is conceived of as the exchange of what the artist offers and what the consumer wants in a specified quantity at a specific price. Seller and buyer have several considerations in their market decisions, which are discussed in turn in the following chapters. On the supply side, for example, we can think about the way the industry is organized:  are there many producers? If so, what is competition like? 2

Introducing cultural economics

Figure 1.1  Economic framework

Is it a highly regulated market? What does it take to become famous in this market? And, on the demand side, we typically ask questions such as whether people are sensitive to price changes. If people become rich, will they want more of a certain good? Is it desirable to offer some culture in a way that everyone can have access to it? A simple demand and supply model as used in economics is a helpful tool to answer such questions. Thus, this simple framework gives us the necessary bones around which we can put conceptual flesh. In addition to these theoretical models, statistics are used to “verify” the predictions of these models in the real world. For example, one could use viewer statistics or licensing fees to quantify the success of Game of Thrones. Moreover, we could think of the regulation in various countries, as well as access to broadband internet, to understand the show’s reach better. And, lastly, one could assess the show’s quality by means of the prizes it received. For all these dimensions of understanding a cultural product, economics offers a helpful analytical toolbox. As the potential applications of economics to the field of culture are vast, this book discusses a diverse set of topics, starting from supply and demand in the cultural industries and societal considerations in the provision and 3

Cultural Economics

consumption of culture, as well as the superstar phenomenon, quality in the arts and the impact of digitization and trade on cultural sectors. All these topics have been the subject of growing attention in the field of economics, not least because of the simple fact that there is a lot of change in the cultural industries as a result of technological developments. The best examples for the impact of technological change come perhaps in the music, film and publishing industries. Nowadays it seems almost impossible to imagine these markets without digital technology, to imagine buying a physical record or a box set in a shop rather than downloading or streaming a digital file from the provider of your choice. And, of course, the death of broadcast television has been confirmed by many at a time when young and old are streaming the latest shows via Netflix or other digital platforms. Needless to say, I am fully aware of the irony of writing a book in the day of e-​readers, and ever shorter attention spans, when I consider myself part of the digital era. Finally, in terms of data as a tool for analysis in economics and for cultural economics more particularly, as with many other disciplines, digitization has opened an entire host of opportunities in terms of quantitative research. It is fair to say that economics has been at the forefront of quantitative analysis in the social sciences. With the availability of big data (from sources such as Wikipedia, IMDb.com or Goodreads.com, to name a few that are relevant for research in cultural economics) and digitization information that was previously buried in archives, books, journals and magazines across the globe, information is now readily available via the web whereas previously it was extremely difficult to access. Combined with advances in computer programming, which integrate data-​harvesting techniques into software packages for data analysis, we are in a playpen of opportunities for anyone wishing to crunch numbers in his or her research. If we start from the premise that there is something to be gained from such an empirical approach to culture, economics certainly has a lot to offer in terms of theory as well as quantitative rigour. The field of cultural economics First, we need to define what cultural economics analyses  –​that is, the sectors that are relevant and that we will investigate in this book. Figure 1.2 4

Introducing cultural economics

Figure 1.2  Cultural industries

depicts the key industries for cultural economics and cultural studies more generally. These branches of culture are largely what is defined as the cultural sector by national statistical offices and international institutions. Moreover, they are helpful in grouping various cultural activities by the similarities of their markets, and often this is reflected in the various research strands in the field. They range from classical art forms such as music, visual and literary arts to the gaming industry, from low-​to highbrow cultural forms. There is an ongoing debate about whether advertising and sports should be included as cultural forms, but, for the purposes of this book, I will use the ­undisputed cultural sectors given above. 5

Cultural Economics

We have entered an exciting time for cultural economics. Cultural industries have experienced many substantial changes in light of technical transformations over recent decades. Digitization, as for most other industries, has had a profound effect on culture and has changed the way art is being produced as well as consumed considerably. Not only have we seen goods turn into digital services (think of CDs having become MP3 files lodged in the cloud, from which you stream your favourite track  –​via a mobile device) we have also seen completely new forms of competition and complementarities between art forms. In terms of competition, the epic quality of some productions from television companies or internet streaming hosts easily competes with a Hollywood film production, thus making competition for limited leisure time and audience attention span fiercer. At the same time, we see musicians exploiting complementarities in the music industry, with an increasing share of their market activity being dedicated to live performances and engaging with fans via social media maintaining their interest in future new releases. After digitization the other great disrupting influence for cultural goods is globalization. With trade in international markets becoming ever more important and accessible in the last 30 years, cultural goods and services have become more heavily exchanged. Consider the global phenomenon that was “Gangnam Style”, the worldwide reach of broadcast series such as Game of Thrones or the international legs of art expos such as Art Basel; one cannot help but acknowledge that culture, too, has gone global. And, yet, cultural preferences are very different across the globe, so that there is a vast diversity in what is available and enjoyed. At the same time, however, tastes adapt and fuse into new cosmopolitan, cross-​cultural products and services, such as fusion food or the growing trend of catering for the Chinese market by including elements in Hollywood films, such as James Bond chasing through Shanghai in Skyfall, casting Wang Xuequi as Dr Wu in Iron Man 3 –​or, indeed, entire films evolving around Chinese culture, such as Kung Fu Panda. Of course, there are also downsides to ever more globalized markets, such as the many ways in which large Hollywood productions alter their content in order to pass the Chinese censor (Bohemian Rhapsody was released in China only after scenes relating to Freddie Mercury’s sexuality were cut).

6

Introducing cultural economics

Moreover, it is very telling that agreements on trade in the audio-​visual sector are the hardest to strike, with discussions being notoriously difficult. This explains the fact that, across all the sectors for which there are World Trade Organization (WTO) agreements, the audio-​visual sector has the lowest number of countries committed to them. Next to cultural preferences and biases, this debate is also reflective of the fact that language, as a transmitter of culture, is deemed worthy of protection by many policy makers. Nonetheless, this protectionist attitude towards culture in trade negotiations demonstrates the special role that culture has in our societies, one that might even warrant measures to ensure diversity in the cultural sector. Big data and cultural insights I want to take some time to discuss the importance of methodology in economics. For the most part, cultural economists start by formulating a hypothesis based on an economic concept or theory. This is then followed by an empirical analysis, often in the form of a regression analysis, in order to verify the hypothesis. Economists, as quantitative social scientists, quickly discovered the use of big data and its possibilities for their research. Two such examples are the studies by Goetzmann et al. (2011) and Oosterlinck (2017), both of which make use of data from Reitlinger’s art catalogue –​one of the few art history works to cover art prices in several volumes (1961–​70). Reitlinger’s work is a seminal source of data for anyone seeking to study historic art prices, as there are few comprehensive sources available for historic prices. Both groups of researchers relied on these data to assess whether art is a good investment. To this end, they digitized the original print version, making it available to the larger research community in economics as well as art history. Similarly, Waldfogel (2011) relies on data from Napster (an early music-​ sharing platform) to answer the question whether the rise of such technology constitutes “the day the music died”  –​or, perhaps somewhat less dramatically, the death of music business as we knew it. Here, too, this research was possible because data on music consumption patterns and consumers’ willingness to pay (or, more precisely, to avoid doing so) had become available. Thus, they could be analysed in order to gain new insights into cultural industries.

7

Cultural Economics

The role of culture in the economy When applying the economic toolbox to the cultural sector, it is also important to note that the cultural industries play an important role for the economy at large. In other words, cultural sectors are of great economic importance in addition to the non-​monetary benefits they bestow on society in terms of social identity and sheer enjoyment. Table 1.1 illustrates this point. Although the absolute share in gross domestic product (GDP) is relatively small for most economies the cultural sector has a comparatively large role in providing employment, often at the intersection of public and private entities. Moreover, revenues in the cultural sector are relatively high, and it is considered a high value-​added industry –​that is, it generates value way above the input costs of a single product or service. Table  1.2 gives a good reflection of the various sectors’ economic size in terms of revenue and employment. Each specific branch has its own organizational structure, possessing many or few producers, offering repeat or one-​off consumption and varying degrees of uniqueness of produced service or product. All these aspects are examined in the course of this book. Curiously, even in 2013 television and newspaper were still the

Table 1.1  Importance of cultural industries Region

Revenues (2013, US$ billion)

Share of regional GDP (%)

Employment (2013, jobs)

North America Europe Asia and the Pacific Latin America and the Caribbean Africa and the Middle East

620 709 743 124

3.3 3.0 3.0 2.2

4,700,000 7,700,000 12,700,000 1,900,000

58

1.1

2,400,000

Note: Rounded figures. Source: UNESCO (2015). 8

Introducing cultural economics

Table 1.2  Sectors in the cultural industries Cultural and creative industry sector

Revenues (2013, US$ billion)

Employment (2013, jobs)

Television Visual arts Newspapers and magazines Advertising Architecture Books Performing arts Gaming Movies Music Radio

447 371 354

3,527,000 6,732,000 2,865,000

285 222 143 127 99 77 65 46

1,953,000 1,668,000 3,670,000 3,358,000 605,000 2,484,000 3,979,000 502,000

Total (before removing double-​counting)

2,285*

31,524,000*

Total (minus double-​counting)

2,253

29,507,000

Note: * = rounded figure. Source: UNESCO (2015).

highest-​earning sectors, despite ongoing discussion about their demise. When taken together, the audio-​visual sector takes by far the biggest share in cultural production, with US$734 billion in revenue alone. A roadmap for creative activities Caves (2000) has formulated several stylized facts to get us started with the economic aspects of culture and offers a roadmap for the concepts ahead of us. I summarize them here in a slightly altered form. • Demand is uncertain. Although this is certainly true for any business it is highly relevant for cultural economics, as tastes can indeed change quickly with internet fads. 9

Cultural Economics

• Art for art’s sake. The biggest motivation for artists is to fulfil their creative goals. However, art creates economic value. • Motley crew. Artists are diverse and non-​substitutable. They are each unique, with a distinct set of skills and talents. • Infinite varieties. Artistic products are multidimensional and very substitutable. • There is an A list. There is a clear income hierarchy for cultural work. • Ars longa. Creative products produce long-​lasting income streams. With the expanding opportunities for research, thanks to technological advances, and ever more societal changes, the merits of interdisciplinary approaches, sharing interests and methods across disciplines, have become larger. Cultural economics is a good example of how widening one’s horizon and analytical toolkit can help us enhance our understanding of the world. When putting on our economics spectacles, the book is organized around several key pillars. • Market forces:  markets, prices and agents (Chapter  2); society (Chapter 3); and demand (Chapter 4). • Supply-​side considerations: artists as superstars and their creativity (Chapter 5); and the assessment of quality (Chapter 6). • Industry aspects: organization of cultural industries (Chapter 7); the great transformations brought about by the internet (Chapter 8) and globalization (Chapter 9). Each chapter follows the same structure. First, the chapter introduces the relevant theoretical concepts of economics using diagrams. Then the recent literature on the topic is considered, in order to establish a better grasp of the empirical findings in the area. Finally, each chapter provides a case study that works through a significant event in the cultural sector and illustrates the concepts in a practical fashion. The book brings together theoretical considerations with real-​life examples and provides inspiration for the application of concepts to other areas of interest. Furthermore, each chapter provides a list encompassing theoretical as well as applied material on the subject for further reading. Each chapter concludes with a brief summary.

10

Introducing cultural economics

Summary • Economics can offer valuable insights for understanding cultural industries. • Economics uses theories and concepts, which make market mechanisms transparent. • Quantitative analysis as undertaken by economists helps capture cultural phenomena, such as the value of an artwork or the impact of streaming on television productions. • The cultural industries are important for creating cultural as well as economic value. • Digitization and globalization have had an impact on culture, which can be analysed through economics.

11

2

Markets, prices and agents

When thinking about the market for cultural goods and services it is important to understand the types of goods and services to be analysed, their properties and the key features of the industry in which they are produced and the demand for them. Together, these ingredients constitute the market, which brings about the quantity as well as price at which the market clears. By and large we can divide the cultural sector into the following main areas:  (a) performing and visual arts, which encompasses theatre, dance, music and opera; (b) the audio-​visual sector, which includes film, games and photography, literature and design of all types; and (c) architecture and heritage sites. Each of these sectors incorporates individuals, private firms and public organizations that engage in the market to offer and consume art experiences of various types. Types of goods and services Many of these cultural goods and services are in fact what we call experience goods, which means that it is hard to assess their quality and the enjoyment they will bestow before purchasing and “experiencing” them. In other words, the exact value the good offers to the consumer can be ascertained only after its consumption. In addition, we learn to appreciate these types of goods the more often we consume them. In essence, this means we develop a taste for sculptures or splatter movies over time with every item consumed. The main preventive hurdle is experiencing them in the first place, as the pleasure or utility they will give us is uncertain. This uncertainty derives from what economists call information asymmetry. In the case of the cultural sector, this means that consumers do not

13

Cultural Economics

know the quality of the good before purchasing it, whereas the producers do know the quality of their product. For producers, the asymmetry is reversed: they know the quality but they do not know the preferences of consumers. Therefore, information is distributed unequally between market participants. Moreover, for experience goods we can gain knowledge from others through their reviews or word-​of-​mouth comments. This is different from a typical consumption good, such as an apple, in that you usually know what you get before you buy and would not spend a lot of time scouring the web for information on it. In addition to being experience goods, cultural goods also embody some properties of information goods –​the main value of the good or service being the information it contains. This information is what consumers are willing to pay for. If you think of a song or book, it typically contains some innovation or unique attribute that is subject to intellectual property rights, such as copyright. Copyright laws protect the creative and original content that the book or song contains. Such copyright protections also ensure that the outcome of the creative process is rewarded. According to economic theory, ensuring that there is monetary reward for creative production provides a monetary incentive to the author. The second reason for the existence of copyrights and other forms of legal exclusion is that cultural goods carry two sets of values: an economic value and a social value. This is what economists call an externality: culture produces benefits beyond what the individual consumes by allowing society at large to benefit from its creation. In other words, culture’s true value is greater than what an individual pays for a unit of it. For example, if you buy a Beatles album you benefit from that album more than what you paid for it, as knowing the music of the Beatles will make you a part of cultural history and more attuned with society, which goes way beyond your private utility of the actual music recording. The market model The workhorse of economics is the model of supply and demand. In order to understand how the market works we need to start from this simple model and its assumptions. Let us assume that producers want to sell their items, and items sell at a price that covers the cost of producing each individual 14

Markets, prices and agents

Figure 2.1  The stereotypical market for goods and services

unit. This cost is called marginal cost. These marginal costs vary with the quantity produced. Typically, for cultural products and services the first unit is the most expensive –​say the first copy of a book or a vinyl record –​and the cost decreases with every unit produced. Consumers, on the other hand, have a demand for these items and a willingness to pay for them according to their own income and preferences. Theoretically, demand and supply will meet when the price and quantity of items at which both seller and buyer are happy with the transaction, and the market is said to be in equilibrium. In other words, prices and quantities are such that supply meets demand. Economists call this an efficient market. This benchmark case is illustrated in Figure 2.1. To work through some of the key dynamics. • The higher the price, the more producers want to produce, therefore the supply curve is upward-​sloping. • The lower the price, the more consumers want to consume, therefore the demand curve is downward-​sloping. • Price and quantity are determined at the intersection of the two curves, which constitutes an equilibrium –​that is, a market outcome 15

Cultural Economics

at which consumers’ willingness to pay and producers’ willingness to produce are equal. • If supply meets demand at the lowest possible unit production cost (marginal cost), the market is efficient. Why? If the price in the market was higher than marginal costs, competing firms would enter the market and supply would increase until prices are driven down to marginal cost level. • In an efficient market, social welfare is maximized as firms’ profits and consumers’ utility are maximized. For the model in Figure 2.1 to work, we need a set of very idealized and stereotypical assumptions. These are as follows: • a large number of buyers and sellers; • low or no entry barriers to the market (everyone could produce the good in principle); • perfect information (everyone knows everything); • no transactions costs (economic exchange is costless, as in the case of currency exchange); • excludability of goods and services (such as by property rights); • homogeneous products (standardized goods, easily producible); and • no economies of scale (whereby each unit costs the same amount to produce, no matter how many are made). As we can easily see when applying these assumptions to our examples above, not all of them hold for cultural products and services. For example, it is hard to imagine economies of scale  –​the more that is produced, the cheaper it is –​in music or in the production of paintings (bar Andy Warhol, who took the idea of industrializing artistic production to a new level). Equally, the assumption of perfect information –​everyone knows everything –​is largely at odds with the idea of an experience good. Nor do we have a large number of buyers and sellers in many cultural sectors; consider the examples of orchestras or theatres, for which we usually have just one supplier per city. Nonetheless, this simplistic, idealized model is an extremely powerful tool to understand market dynamics, and it can be amended easily to fit the segment of the cultural industries that we want to focus on. Most 16

Markets, prices and agents

importantly, it offers variations on our understanding of the production side by offering systematic departures from the “classic case” presented above. Industrial organization in creative industries The demand–​supply model depicts the standard case of perfect competition between producers. In fact, it would be hard to think of a creative market in which we have many producers who offer comparable (homogeneous) products. This is attributable to the fact that cultural products and services are largely heterogeneous, meaning they vary in quality and there are different types across the spectrum of possible products one could buy. Think of the many types of book genres you could buy, from romance to sci-​ fi to historic or crime novels. Even within genres, there is a range of variety. For example, few would argue that Harry Potter and the Twilight series are comparable or substitutable even though they are of the same book genre. This product differentiation is characteristic for markets that have some form of imperfect competition. As seen in Figure 2.2, our benchmark case of perfect competition is on the very left, with maximum competition and the least concentration of market players on the production side. As it is an idealized case it is hard to give a real-​world example of a perfectly competitive cultural market. At the other end you have a monopoly, with a single provider of a good or service who has full control over prices, quantities and quality, and entry to the market is largely impossible, such as a local symphonic orchestra. As there is typically only the one orchestra in a city, there is no competition within the city unless people are willing to travel to the next city big enough to have an orchestra. Moreover, as demand is limited, it typically does not make sense to have several symphony orchestras in a city, as they are usually very expensive to maintain.

Figure 2.2  Market structures 17

Cultural Economics

As most cultural sectors are organized in some intermediate market structure, we need to take a closer look at them. 1. Oligopoly: • a few firms offering goods and services (homogeneous or differentiated); • entry to the market is relatively difficult; and • firms have some price-​setting power, usually considerable profits. • Example: movie sector, music production. 2. Monopolistic competition: • many firms offering differentiated goods and services; • entry to the market is relatively easy; and • firms have limited price-​setting power. • Examples: online newspapers, web design. From these concepts we can already gather that we need to consider carefully the characteristics of the cultural market that we want to analyse, as they all have unique features that explain the prices, quantities and varieties we observe. This is the interplay between artists, gatekeepers (such as publishers and producers) and consumers that largely determines prices and quantities sold in the market.

Markets at work: a pop concert To put these ideas into action, we can apply our basic framework to the case of a live pop concert to illustrate the dynamics for one of the cultural sectors (the discussion is adapted from Krueger 2019). The producer of the show (in conjunction with the performer) has discretion over the price, as the performer has some unique feature that makes this show a differentiated service. Well before the concert, the producer decides the ticket price and the venue for the show, which in turn determines the number of tickets available for each performance. As the venue has only a certain capacity, there is a fixed number of seats per show. Thus, supply is fixed, as depicted in Figure 2.3 by the solid vertical line S1.

18

Markets, prices and agents

Figure 2.3  The market for a pop concert

The price has to be set by the producer before the show is announced, which is depicted by the dashed horizontal line marked P1. As laid out above, consumers are sensitive to prices, even those for seeing their favourite artists, and so the demand curve D is downward-​sloping. As a live show definitely fulfils our criteria for an experience good and is subject to information asymmetries, let us consider two scenarios: one when the show is a hit, the other when the show is a flop. Scenario 1 is depicted in Figure 2.4. In the event the show is a hit, we have excess demand at the current price. This results from the fact that, at P1, many more people would like to see the show –​in fact, as many as depicted in point b in the diagram –​and so prices are too low. Thus, option 1 for the producer would be to get a larger venue, so that all fans can be catered for; this is depicted by S2, an expansion of supply. Alternatively, the producer could consider increasing ticket prices to P2 and staying in the original venue. If the show turns out to be a flop, with fewer people than previously anticipated attending the show and the venue thus too big, this is depicted in Figure 2.5. Note that, to illustrate this scenario, S1 is now further to the right 19

Cultural Economics

Figure 2.4  The market for a pop concert: success scenario

Figure 2.5  The market for a pop concert: flop scenario 20

Markets, prices and agents

in the diagram. In this event, we have excess supply and the venue is either too big or tickets are too expensive to clear the market. Thus, the producer can either reduce ticket prices to P2 to meet consumers’ demand or move the show to a smaller venue and thus change the quantity of tickets to the one consistent with S2. In both cases the outcome largely depends on producers’ ability to foresee what demand will be like. If they were able to perfectly predict how the show would be perceived, they could set prices and pick venues accordingly and always get it right. However, as a live show is typically subject to large information asymmetries, producers need to navigate the uncertainty and risk of their productions. When we take this simple static model into the real world, we find that market mechanisms are indeed at play. Box-​office and ticket agents do sell tickets at face value, while there is a secondary market on which tickets for hot shows (excess demand) are sold for more than face value. Moreover, Krueger (2005) finds, using data from US pop concerts, that average ticket prices rose by 82 per cent between 1996 and 2003. This effect is especially strong for shows staged by superstar performers. In the event of flop shows, producers prefer to change to a smaller venue, perhaps seeking to mitigate the bad quality signal that lower prices would signal to the audience. Moreover, lowering ticket prices might upset fans who had already bought tickets at a higher price. Let us consider one alternative strategy that producers can use to deal with uncertainty in the market. In both scenarios, producers of shows would ideally like to sell their tickets at different price levels for different groups of consumers, such as discounts for students or seniors, for example. This is what is referred to as price discrimination in economics, and it is illustrated in Figure 2.6. For each segment of the demand curve, and thus each instance of willingness to pay, producers will offer a differently priced ticket option. In doing so, they can cater flexibly to the willingness to pay of customers in a more targeted fashion, thus increasing their profits. By using a discriminating pricing strategy they can make adjustments to their original strategy much more easily. In sum, this simple example illustrates key market dynamics, while also showing that cultural sectors are subject to time inconsistencies. It is very hard to predict tastes and fads in the market in advance, and often there is a lot of upfront risk involved in decision-​making in the cultural industries. 21

Cultural Economics

Figure 2.6  The market for a pop concert: price discrimination

Case study: art auctions Art auctions are a good Petri dish of markets at work, as supply and demand clear at a price determined by the hammer of the auctioneer at the auction house. For the upper end of the art market, there often is a clear restricted supply (there are only so many Rothko oil paintings in the market) as well as demand (there are only so many rich people who can afford to buy a Rothko). In this set-​up, market forces, such as globalization and the financial crisis, can be captured rather neatly, as they directly impact on prices via market sentiment. A case in point is the financial crisis of 2007/​8. Figure 2.7 shows how much art auction turnover rallied during and after the financial crisis, with turnover almost doubling between 2008 and 2011. This is mostly explained by waning confidence in the global investment market  –​after all, this was in the middle of a financial crisis –​combined with low returns in most conventional investment forms, such as bonds and shares. Thus, market participants were looking for alternative ways to invest their money. 22

Markets, prices and agents

Figure 2.7  Art auctions during the financial crisis: global art auction turnover, 2008–​2018

And, as happens to be the case for the high end of the art market, paintings are an investment in which you can easily allocate rather large sums of money. Given that paintings are a tangible and portable investment, similar to gold (unlike bonds or shares, which you cannot physically take home), it seems that in an environment of uncertainty they provided something of a safe haven for investors. However, the increase in market participants engaging in a market of relatively small and fixed supply pushes prices higher, as competition is greater and bidding for a stable amount of artworks on the market becomes fiercer (of course, there were also sales sparked by the financial crisis, although the effect in all likelihood was small, as the need for liquidity –​that is, cash or cash-​equivalent assets –​was relatively minor). And, of course, amidst such a price hike there were several record prices achieved in the market, which attracted wide public attention. Most notable perhaps was the sale of Leonardo da Vinci’s Salvator Mundi in 2017, which sold for US$450 million, and in the same year a piece by Jean-​Michel Basquiat was sold for US$112 million. Although these are stunning single prices, it is important to note, as Spaenjers et al. (2015) have done, that the density of record prices increased in the aftermath of the financial crisis. And, as financial markets became ever more integrated across the globe, so did art markets. This is depicted in Figure  2.8. Although traditionally the art market is largely in the hands of the British and Americans, recently China has become a major player in the market. 23

Cultural Economics

Figure 2.8  Art auctions going global: share of global art auction turnover, 2018

This is an example of the economic truism that, as countries get richer, they demand more of everything, including high-​end commodities such as fine art, as the share of wealthy households in society increases the share of potential players in the art market. This is also reflected in the fact that Christie’s and Sotheby’s have several branches across Asia, as well as many of the large art fairs having established an Asian event, such as Art Basel Hong Kong. In addition, Chinese artists have successfully entered the market because they were able to avail themselves of marketing channels through the main gatekeepers in the market, namely auction houses and art fairs, which connect artists to collectors. One example is the rise of Zeng Fanzhi, who is the top contemporary Chinese artist on the market, with his painting The Last Supper famously selling for US$23.3 million in Hong Kong in 2013. Thus, it seems that art collectors’ tastes and portfolio choices have also adapted to the ever more globalized and capitalized market. The impact of both the financial crisis and globalization is well illustrated in the market for fine art, as it is a good indicator for how culture is affected by economic as well as societal changes. As market forces are visible directly in auction markets, this case illustrates the key elements of changing factors in the demand and supply sides in a market.

24

Markets, prices and agents

Summary • Culture is considered an experience good and also has characteristics of an information good. • The standard model of demand and supply is helpful in understanding price and quantity setting in cultural sectors. • Product characteristics determine market structures in the cultural industries, with oligopolies and monopolistic competition being the most common forms of competition. • Market dynamics and producer decisions can be analysed using the supply and demand framework, and adjustments to ex ante decisions can be made according to market reception for experience goods and services. • Art auctions are a good case for illustrating market forces that change demand and supply more fundamentally, as is the case with the financial crisis and globalization.

25

3

Society and culture: public provision and institutional aspects

In this chapter, we will explore the provision of culture  –​that is, who produces culture and under what conditions. The most important distinction is between the private and public sector roles, both of which engage in the production of culture but do so under very different conditions and often with very different agendas. To be precise, if we start from a market model, set out in the previous chapter, we are thinking of culture as a private good or service that underlies the production logic, as is the case with any other commodity, and is produced by privately owned companies, such as Warner Brothers or Sony Films. Although we have some European film and television networks that are largely public, such as the BBC, the general market mechanisms apply for the music and film industry to a large extent. However, in some respects this might not capture the whole picture. Consider museums, for example, or theatres and heritage sites; in many countries the state plays an important role in providing these services. Therefore, we are going to have a closer look at what economics offers for the analysis of the public provision of cultural goods. This chapter establishes the difference between private and public entities involved in cultural sectors and the different incentives and agendas that the various stakeholders have in these industries, as well as looking at some practical examples to illustrate the issue. Culture as a public good If we think of culture as having positive externalities, meaning culture produces a value above and beyond private consumption, an economist would classify that good or service as a public good. The classic example

27

Cultural Economics

is that of a well-​maintained garden, which makes its owner happy but also affords benefits to the neighbours and the community at large. Thus, it creates benefits beyond the owner’s own willingness to pay for plants. Of course, goods can also carry negative externalities, such as noise pollution when neighbours might not be keen on Ed Sheeran blasting through their neighbourhood during an open-​air concert. In both cases, private producers do not internalize  –​that is, are not incorporating –​the externality of their good or service into their production decision; to put it another way, you maintain the garden solely for your own private needs and wants, not for those of the public. To visualize this, Figure 3.1 shows the same scissor diagram that we have seen earlier, but now we have incorporated the fact that private and social values differ, with social value being higher than private value. As the social value is larger than the private value for most cultural goods, the demand curve incorporating private as well as social benefit is to the right of the one reflecting private value only. If that is the case, the socially optimal quantity is greater than the private one. This, in essence, is the case

Figure 3.1  Positive externalities in cultural goods 28

Society and culture

for the public provision of the arts. Private entities would not provide the socially optimal quantity, as the market price would be too low for them to be willing to do so. And this is where the government has scope for entering the market and providing museums, parks and so on at a price below the market in order to ensure provision and broad public access. If we look at the supply side we see that, similarly to the case of consumption, we can illustrate the positive social value of a good in the production schedule –​that is, the supply curve (see Figure 3.2). If there is a positive externality, the social costs (MSC = marginal social costs) will be higher than the private costs of producing that good (MPC = marginal private costs) and the socially optimal quantity will be larger than that including private costs and value only. As such, it might be worth governments to contemplate higher costs for supplying museums, art schools and so on, as they are considering the sum of private benefits as well as social benefit and valuing them against the costs. In other words, they are incorporating social benefit into their supply decision, an aspect of the decision making that a private company would not do. Thus, if there is a large social benefit there is a welfare gain

Figure 3.2  The production of public cultural goods 29

Cultural Economics

for society through public provision, as highlighted in the diagram. At this point it is useful to formalize the properties of public goods in culture and to develop a framework with which to classify the types of goods and services in the cultural industries based on their key properties. In order to obtain a better understanding of public goods, we distinguish between the degree of rivalry (competition for the same good) in consumption and the excludability (access to the same good) of the good or service. The matrix in Figure 3.3 illustrates these properties for various cultural products. Starting in the top left corner, private goods are both excludable and rival: if one eats an apple one cannot have it again. The apple provides an example of something that is utterly consumed and then unavailable again; it is hard to think of a cultural good for which this would be absolutely true. Nonetheless, items such as vinyl records or auctioned paintings are considered private goods, as they are both excludable and rival. One interesting case in this context might in fact be the self-​destructing painting by Banksy auctioned at Sotheby’s in London in October 2018. After the bidder had won the auction, at £1.4 million, the painting shredded itself in the auction room. This is an interesting artistic twist on the categorization

Figure 3.3  Characteristics of public goods 30

Society and culture

of art as a consumable, private good, which challenges our perception of art, its ownership and its status as a luxury good. If we now move to the top right corner, we see that cable television –​such as HBO, for e­ xample –​is classified as a public good, in that it is not rivalrous: your watching Game of Thrones will not hinder me from watching it, too. However, cable television is excludable: HBO and Netflix alike make sure that they are paid for their services, and thereby they are excluding consumers who are not willing to pay for their content. In the bottom left corner, we have goods that are not excludable while being rival. The best example is archaeological artefacts, which can be accessed by anyone with the necessary know-​how and tools. They are not excludable, by means of barriers or entry fees, unless they have been transformed into a heritage site. However, such archaeological artefacts of ancient times are rivalrous in that one person’s excavation and appropriation of the good prevents another one from doing the same. This is what is referred to as the tragedy of the commons, as most common resources are non-​excludable, and this very property leads to overuse of these resources and inefficient allocations. If you think of fish in the ocean, overfishing across the globe and the difficulty in regulating this market, the problem is apparent. In the bottom right corner, we have the “purest” public good: one that is both non-​rivalrous and non-​excludable. The Trevi Fountain in Rome is an example: anyone can go and enjoy being there and taking pictures, and your presence will not prevent anybody else from being there and enjoying the fountain. Of course, this has limitations, as, in fact, big crowds at this cultural sight do lessen the individual experience, especially during peak times. However, policy measures to curb visitors are largely pointless while keeping access free because of the ingrained properties of the good. Nonetheless, we see policy makers seeking to regulate the behaviours of customers to minimize the negative externalities of crowded cultural sights. One such example is the case of the Roman municipal authorities introducing hefty fines for littering or climbing into the fountain in spring 2019. All these examples show that culture, thanks to its inherent nature, has properties of private as well as public goods. At one end of the spectrum, we have a social value that lies above private value, and therefore provides a theoretical basis for government to provide the service or good. At the other end of the spectrum, the non-​excludability of many cultural experiences leads to what is referred to as free riding in economics –​that is, seeking to 31

Cultural Economics

obtain the benefit of a good without paying for it. Free riding, in fact, may lead to the underproduction of a good or service if the problem is large relative to the profits earned from paying consumers. Again, these considerations demonstrate how important it is to be aware of the market and goods properties of the cultural industries in order to understand firms’ and consumers’ behaviour. In essence, this touches upon the topic of piracy, which seeks to circumvent the excludability property by providing the content free of charge and, for the most part, right after the initial airtime online. Despite the fact that this is an infringement of copyright, technological advances, such as file types and data-​ripping techniques, are making it ever harder for companies to make their goods and services totally excludable. Then again, there have been cases when leaks of popular shows, such as Game of Thrones, have helped their popularity across the globe. A further factor in this is the fact that many networks, especially before the arrival of Netflix and similar streaming services, had fairly restrictive airing policies across different national networks. In other words, although there were no linguistic or other barriers to watching Game of Thrones in the United Kingdom, say, it was not easily available there and it was not streamable on demand. Thus, the incentive to obtain the most recent episode or season illegally for customers keen to watch the show was relatively high. It is important to note that such dynamics are possible only because of the market structure and its distinct properties, with products being legally protected. Such protection and the legal framework for it has adapted with technology in order to correct the market in a desirable way. Institutional issues in the public provision of culture Now that the difference between private and public cultural sectors has been established and the different incentives and agendas of the various stakeholders in these industries has been discussed, we can turn to the data. There are various industries that are largely private in almost all countries, such as architecture, music production, book publishing and design. Nonetheless, we observe varying degrees of regulation even for these

32

Society and culture

private markets, on account of the special status culture has in our society and the social value of accessibility and affordability, which is what most policy makers value. One example of regulation is the fixed book price (FBP) system. Essentially, it states that retail prices for books have to reflect the price that has been negotiated between publishers and resellers. That is why we observe relatively uniform prices across the globe for books, as, for the most part, the various language versions are produced and distributed by the same publishers. Although such discretion over prices might be an instrument to ensure the accessibility of books, it also effectively curbs price competition in the market, with best-​sellers costing the same as total flops. Moreover, countries have different traditions and perceptions of how they want to promote culture and who is responsible for its provision. Most notably, and in somewhat simplified form, we have a distinction between Europe and the United States, with the United States having strong private sector involvement in culture, many museums being operated by private foundations or supported predominantly by private collectors. This is in contrast to Europe, where most of the museums, opera houses, theatres and so on are in public hands. This difference can be seen in Figure 3.4. The most

Figure 3.4  Public spending on culture, 2016

33

Cultural Economics

prolific example of a relatively big public cultural sector is Germany, which not only devotes a bigger share of its budget to cultural spending than other countries but also has the highest density of public theatres, opera houses and museums, with even medium-​sized towns having relatively large and prestigious cultural institutions. Another interesting country is the United Kingdom, which has a commitment to operating national museums for free across the country while also being host to many prestigious private foundations. This might be called a mixed system, with the Tate Modern being free in general while the large blockbuster exhibitions have an entrance fee. Thereby, the United Kingdom is making sure that art and culture are accessible, with some degree of price discrimination and excludability at the upper end of the tier. This kind of mixed system can be found in many countries across Europe. There are many reasons for these differences in managing the cultural sector. Of course, such patterns are rooted in historic traditions and identity to a large extent. One is perhaps down to the idea of social accessibility, which is ensured in Europe by means of public provision and/​or low entrance prices. The United States has higher prices and less public ownership and relies more heavily on private efforts, which are incentivized largely through the country’s tax system. One could discuss at length the various implications of either system and which is fairer in terms of tax burden, accessibility and affordability. However, this discussion is outside the scope of this book. We will pay further attention to redistribution effects in the case study below in order to cover the basic dynamics behind this discussion. There is no free lunch When looking at the public provision of goods it should also be borne in mind that public providers have different decision-​making mechanisms and objectives from private firms. As noted above, governments may consider social value and incorporate it into their spending decisions, thereby effectively dealing with market imperfections and alleviating underprovision by the market. However, there are several considerations to take into account when we look into the state as a player in cultural sectors. 34

Society and culture

• It is difficult to know what exactly the social value is. Although we know that having an intelligent, highly educated and culturally well-​versed society has its merits, it is hard to put a price tag on these attributes. Thus, it is difficult to determine exactly what the right input costs, quantities and prices should be to achieve an efficient outcome. • There is an opportunity cost in terms of spending tax money. Nevertheless, every decision the government undertakes in terms of funding a museum or setting prices for the local theatre box office implicitly places a value on these activities. In terms of good public management it is important that funds are spent on the most worthwhile activities in order to ensure a socially optimal outcome. As such, it is important to be aware of the fact that publicly funded cultural activities come with an opportunity cost –​that is, the cost of the next best alternative way for which the money could be spent. • There is a principal–​agent conflict. This can arise if the agent –​in our case, the public policy maker –​makes a decision that is not necessary in the principal’s (i.e. the public’s) best interest. A recent example comes from the city of Hamburg, in Germany, where the local government decided to have a new philharmonic hall built in 2007 at an estimated cost of €244 million. It ended up costing around €866 million by the time it opened its doors in 2017. Such a major public venture on a prestigious cultural venue caused concern to many Hamburgers, who claimed that the money would have been better spent on education. This discrepancy between what the principal deems the best way to spend the money and the agents’ interest in a prestigious building is what is called principal–​agent conflict. If indeed the agent acts in its own best interests, we term that moral hazard. • Baumol’s cost disease. When it comes to earnings in the cultural sector, we are often confronted with a winner-​takes-​all distribution of earnings. In other words, a few top stars earn the biggest share of the industry’s market. In standard economic theory we link earnings to productivity, indicating that wages should be set at a level that reflects marginal productivity. We are going to explore that link further in Chapter 5. With regard to the public sector and the spending of taxpayers’ money for cultural activities, the public entity is faced with what is called the Baumol effect: although productivity does not increase over time, wages do increase in the cultural sectors. 35

Cultural Economics

Many jobs in the cultural sector, such as curating, playing the violin or directing a play, require high levels of education. Wages reflect this fact. Nonetheless, the productivity gains in these activities –​that is, the increase in efficiency over time –​are negligible. Any violin player will be able to play only a certain number of pieces in an hour at a certain quality no matter how much technology progresses. Thus, any wage increases in these sectors might be detached from productivity increases. As shown in Figure 3.5, we can see that branches that benefit a lot from technological progress are also subject to higher inflation –​that is, growth in price levels and wages. Thus, public cultural institutions face the problem that they have to set wages in a way that is consistent with the value provided by their employees while at the same time being able to set prices such that the public is able to afford plays, theatres and museum tickets. This is not an issue that is unique to the public cultural sectors; however, it is important to keep this in mind when considering costs for cultural provision in the public sector. Protection versus freedom The government can enter cultural markets either by providing cultural goods and services directly or by setting the institutional framework in which cultural (or intellectual) production takes place. In other words, the government needs to provide a legal framework, which encourages creativity and innovation in the arts and science and beyond while at the same time protecting intellectual property. This is not always an easy balance to strike. Most ideas or creative products are in their very nature public goods: if someone comes up with the main plot of The Sopranos and puts the idea on the internet, anyone, essentially, can jump on the idea. The idea as such is non-​excludable and non-​rivalrous, unless policy makers or the original innovators find mechanisms to protect the original idea by making it excludable through legal or social contracts (there is no remedy for the rivalry property, however). Thus, in most countries artists and inventors more generally are given incentives for producing novel goods and services by offering them the means of protection for their intellectual and creative property. This can come in the form of a licence to use or distribute, a copyright, a patent, a trademark or a secrecy agreement, to name the most obvious. 36

Society and culture

Figure 3.5  Wages and technological progress: (a) US GDP by expenditure, 2005 and 2105; (b) US inflation, 1978–​2012 Notes: Panel (a): * = based on an extrapolation of current trends. Panel (b): 1978 = 100. Source: The Economist.

This mechanism is particularly important because, during the process of creation, the outcome is always uncertain. If you consider J. K. Rowling’s first Harry Potter book it is hard to imagine that anyone had anticipated the major success it would become. As market success and, therefore, the income streams that can be generated with a particular cultural activity are 37

Cultural Economics

unpredictable, we can consider them a rather risky investment in terms of money and time. Consequently, it is a good strategy for policy makers to encourage individual creators to engage in risky endeavours, such as writing a book or a musical piece, by allowing them to secure the income stream which comes with the product in the future by means of an exclusive right to the original content. Of course, this relies on the assumption that artists care about the monetary reward for their works. However, even if that may not be their main motivation, it is still important that the institutional framework is such that artists can make a legal claim to their work of authorship and its expressions. We all know the many famous lawsuits of artists suing colleagues for stealing a certain riff or melody –​one such case being Katy Perry, who has been prosecuted for copyright infringement for her song “Dark Horse” and who was liable to pay US$2.8 million to the original songwriter Flame, whose riff Perry allegedly “stole”. And there are many other famous cases like this, such as Led Zeppelin’s “Stairway to Heaven” or Robin Thicke and Pharrell Williams’ “Blurred Lines” (Bosher 2019). Figure  3.6 depicts the many copyright complaints that are linked to piracy or the illegal usage of content on the web. Here, too, one can link the fact not only that industries and their key players need to adapt to advances in technology but also that institutions need to adapt, in order to provide a safe regulatory framework for participants. One might speculate whether the rise of streaming platforms such as Spotify is the industry’s technical answer to online piracy. To that end, Figure 3.7 might be indicative of the fact that streaming became hugely popular at a time –​starting in 2011 –​when digitization was in full bloom and peer-​to-​peer (P2P) file-​sharing platforms were at their peak, with a constant decrease thereafter. Case study: political preferences and cultural spending It is no coincidence that orchestras were used in the earlier examples, as they are typically funded publicly in many countries, or at least receive subsidies in some form. To this end, Germany offers a good example of a country in which the public sector is one of the key players in the provision of culture. This is reflected in the fact that nearly every mid-​size town has an orchestra or a venue that can host one. 38

Society and culture

Figure 3.6  Copyright infringements: most-​targeted websites in copyright complaints to Google, 2011–​2018

Figure 3.7  Streaming: US recorded music revenues, 1990–​2017 Note: * = estimate. Sources: The Economist, Recording Industry Association of America (RIAA) and MIDiA Research.

39

Cultural Economics

For the case of orchestras, Schulze and Rose (1998) obtained information on the actual subsidies received by the main orchestras in Germany. As the numbers show (see Tables 3.1 and 3.2), the subsidization by the government is substantial, although it also has a large standard deviation, implying that not all towns are equipping their orchestras equally well. Nonetheless, the majority of orchestras in Germany are largely funded by public entities. Unfortunately, there is no study that analyses more recent data; however, as political habits usually die hard, it seems fair to assume that numbers today will still be comparable. Table 3.1  Subsidies of orchestras in Germany Mean Direct subsidies 6,835 Total subsidies 7,981 Subsidization ratio 0.779

Median

Standard deviation

5,465 6,115 0.857

5,689 6,384 0.191

Note: Number of observations: 49. Total subsidies include direct subsidies plus indirect subsidization through remittances of theatres and operas, which are likewise subsidized. Subsidization ratio is defined as total subsidies divided by total revenues (including subsidies). Source: Schulze & Rose (1998).

Table 3.2  Subsidization of symphony and chamber orchestras in Germany Orchestra type

Mean

Median

Standard deviation

Symphony orchestras

Direct subsidies Total subsidies Subsidization ratio

7,790 9,126 0.821

6,156 6,564 0.865

5,588 6,178 0.125

Chamber orchestras

Total (= direct) subsidies Subsidization ratio

1,107

1,506

945

0.536

0.682

0.328

Notes: Units are DM thousands. Number of observations: 42 symphony orchestras, 7 chamber orchestras. See note to Table 3.1.

40

Society and culture

In addition, a study by Potrafke (2011) analyses how government ideologies determined public spending on culture in Germany between 1974 and 2006. To this end, he uses variation in the elected parties’ ideologies in order to tease out their underlying preferences on spending on cultural affairs. As Germany is a federal state, Potrafke can use the variation in party representation at both the federal and the state levels. When looking at these spending preferences more granularly, Potrafke provides indicative evidence that, for a 1 per cent increase in the unemployment rate, governments increase spending on cultural affairs as a share of GDP by 0.07 per cent. Thus, the government compensates for a sluggish economy by expanding public expenditure, in culture as well as in other fields. Moreover, Potrafke finds that left-​wing governments spend more on general schooling while decreasing spending on culture slightly while right-​ wing governments tend to spend more on universities and cultural affairs. The author concludes that these preferences reflect the parties’ ideologies but also their constituencies’ preferences; right-​wing voters might have a stronger preference for visiting theatres and museums than left-​wing voters. Potrafke (2010) goes on to analyse referendum results on building a concert hall in Konstanz, Germany, to further investigate the link between public preferences for cultural spending and party ideology. There, too, he finds that it was right-​wing voters who tended to be more in favour of building the concert hall. The author ties that back to the close coupling of constituents’ and politicians’ preferences, which can mitigate any principal–​ agent conflict as described above. Summary • Culture has public good aspects: it is only to a certain extent excludable through legal and social contracts. • Public goods are typically underproduced if they are not produced by a public entity. Thus, we observe a relatively large number of public players in markets for cultural goods and services. • Different countries have different preferences for the public provision of culture, which is largely explained by their tax system and political preferences.

41

Cultural Economics

• Public intervention is also important for cultural industries, as institutions matter for the production of creative goods and services. In other words, artists and innovators’ ideas and elaborations need to be excludable. • Technological progress poses a challenge for wage setting as well as institutional frameworks. • Political parties’ preferences can be used to capture their agency in relation to voters’ preferences.

42

4

Demand for culture

What characterizes the demand for culture? On the one hand, it encompasses the concept of willingness to pay, which we have introduced earlier as the key ingredient behind the demand curve. On the other, it includes preferences for the consumption of cultural goods. To this end, we will explore the economic theory of demand and other motivations for consuming art, such as investment considerations and the social factors that might make us more inclined to consume cultural products. When thinking of consumers in economics, we almost always rely on assumptions about why we go out and spend our money on movies, plays and books the way we do. It is no secret that economists rely on the concept of homo economicus, namely that consumers make rational consumption decisions to maximize their utility with the money they have available to spend. In other words, the only decisions that rational consumers make are ones that will make them better off. Of course, we can disagree with this concept, especially when applying it to the realm of culture, where we often go way beyond the mere fulfilment of physical needs such as hunger or thirst. In these simple, mechanical consumption decisions –​I am hungry, so I buy an apple –​we might go with more or less rational decision making by consumers. However, when it comes to art, it seems obvious that tastes play a much stronger role than in other product categories. By binge-​watching box sets or pressing the repeat button on your favourite song, it is evident that the consumption of culture is a different animal. Nonetheless, the key features of a limited budget in terms of time and money are still applicable even to the most diehard Suits fan. Moreover, some sensitivity to price is still prevalent even if we are diehard fans.

43

Cultural Economics

Preferences To start with the fact that each of our preferences are a given, we might not necessarily be able to capture them in their entirety; however, we reveal our preferences in the market by our decisions and actions. If you prefer Beyoncé over Bruno Mars, you will probably buy more Beyoncé songs and thus have a higher demand for her music than for Bruno Mars’  –​perhaps even exhibit a higher willingness to pay for Beyoncé’s shows and merchandise. When thinking in terms of demand for a good or service it is often useful to think in a dynamic fashion. The key question we want to answer is: how do you react to changes in the main determinants of your consumption, namely your income and prices? How sensitive are customers to changes in prices (and income)? To this end, we need to introduce the concept of elasticity  –​that is, the degree to which you adjust your consumption in response to a change in price (or income). There are three different demand elasticities. ∆ Q /Q Own-​price elasticity: = p ∆ P/P Income elasticity: Cross-​price elasticity:

∆ Q /Q ∆ Y /Y

= y

∆ Qi / Qi ∆ Pj / Pj

=  pj

Own-​price elasticity tells you how you will adjust your quantity demanded (change Q/​Q) relative to a change in price (change P/​P). Consider Beyoncé again. If a song of hers previously cost US$1.00 and now the price has increased to US$1.10, you might respond by decreasing your consumption of her songs. The change in how much you respond to this increase in price is expressed in proportion to the price increase. There are three possible scenarios for own-​price elasticity. • Case 1: If prices increase by 10 per cent, as in our example, and you reduce consumption by 10 per cent –​so by the same percentage –​your demand is unit elastic and in mathematical terms equal to one. 44

Demand for culture

• Case 2: You might have a more extreme reaction to such an increase in prices and stop caring about Beyoncé’s music and reduce your demand by more than 10 per cent. In this case, your demand would be elastic that is, you respond to a change in prices more than proportionally (so elasticity > 1). • Case 3:  You might be so hooked on Beyoncé that you might not respond to the price change at all. In this event, your demand is said to be inelastic that is, you respond to the change in price less than proportionally (so elasticity  1). In other words, the richer you become the larger the percentage 47

Cultural Economics

of your income you spend on a certain good or service. These types of goods are called luxury goods. Most cultural goods, especially those considered highbrow, such as opera or ballet, are considered luxury goods, as a large fraction of consumers of these art forms is relatively well off. Empirically, we know that for most cultural goods and services the income elasticity is approximately 1.  At first sight, this seems at odds with the fact that art is something that we can typically afford more of when we hit a higher income bracket. However, earning more money also means that the opportunity costs of leisure time are rising. In essence, the value of time increases with income, and the trade-​off between an hour worked and an hour spent watching a movie becomes costlier with higher income. If we take this into account then it makes sense that, especially for time-​consuming cultural activities, we do not observe elasticities much greater than 1. Lastly, we need to consider cross-​price elasticities for a complete picture of demand determinants. Cross-​price elasticities reflect how consumers react to price changes in alternative goods and services. This concept is reflective of the fact that consumers do not make their decision in isolation but are fully aware that there are alternative options to a particular good that is available. Here we consider two cases. • Case 1: Two goods are complements. If the price of good A changes, the quantity consumed of B goes down, and vice versa. In other words, the elasticity is negative. The easiest way to think of this is as bundles of goods that are typically consumed together, such as paintbrushes and paint or streaming services and a speaker, housing lots and architectural services, e-​books and e-​readers. Typically, we can expect those markets to be closely intertwined and co-​moving, with momentum in the one translating into the other quickly. • Case 2: Two goods are substitutes. If the price for good A increases, the quantity demanded of B increases. In other words, the cross-​price elasticity is positive. All in all, it is hard to pinpoint a clear-​cut example of this case, as this truly does depend on the individual’s tastes and preferences. Nonetheless, one could think of Bruno Mars and Beyoncé again. If I like them both equally I would see the one with the lower 48

Demand for culture

ticket prices. Similarly, if I am indifferent between seeing a movie or a football match I would go to the one that is cheaper. Equipped with these different factors that lie behind the demand curve and consumer behaviour in the cultural industries, we now have one further tool with which we can analyse the cultural economy. Pay as much as you want In 2007 Radiohead released their new album, In Rainbows. This was a treat not only for their fans but also for media and music industry stakeholders worldwide. The record had been released through their own label’s website with a “pay as much as you want” scheme. That meant anybody wishing to obtain the album could decide themselves what it was worth to them and pay the price accordingly when downloading the album. This was an interesting experiment in terms of customers revealing their preferences. As we have seen above, we know that customers act according to their preferences; however, in this event, full discretion over the price was given to customers. Although this certainly meant that Radiohead faced uncertainty about the income stream coming from the release of their album, they also had full discretion over the artistic process as well as the timing of the release. In other words, it allowed them discretion over the production process of music outside the standard procedure of the major labels, for which they had also produced previously. When looking at the outcome of this release (see Table 4.1), we see that 62 per cent downloaded the record for free while the average price paid by paying customers worldwide amounted to US$6.00. Rolling Stone magazine reported later (Kreps 2008) that Radiohead had sold about 3 million copies straight after the album’s release. One can only speculate how the media interest they had received might have impacted on sales or free downloads and, later, on tour date sales. Interestingly enough, it seems that letting consumers pay according to their own private value ended up amounting to a record price that was slightly below what major labels were charging at the time but nonetheless a reasonable price. In addition to that, Radiohead’s decision had a large impact on the music industry, which at the time was grappling with lower revenues in light of 49

Cultural Economics

Table 4.1  Pay as much as you want Radiohead’s In Rainbows downloads, 1–​29 October 2007 Worldwide Percentage who paid for download Percentage who downloaded for free Average US$ spend per paid download Average US$ spend per all downloads

Non-​US

38 62 6.00

United States 40 60 8.05

2.26

3.23

1.68

36 64 4.64

Source: Comscore.

waning record sales, piracy and new file formats and technology disrupting the market. One might even say it was an early signal to the market that business models had to adapt to a new reality and producers would have to become more flexible and, ultimately, accept higher income uncertainty. Thus, this case ties together industry and demand considerations in a rather unusual set-​up. In fact, many others have adopted similar pricing strategies since then, including The Guardian and Ubuntu. Such pay models mitigate between two modes: free accessibility, as promoted by the internet, and paying for quality. Discretion over pricing is left to the customer in return for the promise of a high-​quality product. Moreover, with the promise of high quality there often is a promise of independence from gatekeepers in the market, which is maintained by the support of paying consumers. And these paying consumers in turn cross-​subsidize those who choose not to pay. Consume to impress Another interesting aspect of consumption, next to our own private appreciation and pleasure in culture, is the fact that consumption also produces an externality in terms of our social status. Through means of education and cultural consumption, among others things, we form our identities and we connect with our friends, families and colleagues. In short, there is an incentive for cultural consumption beyond our private preferences. This aspect 50

Demand for culture

was analysed in depth by Chan and Goldthorpe (2007) using survey data in the United Kingdom on music consumption. In essence, they find that music consumption is linked to social status as well as education. One could argue that we want to be like the people who are in our social stratum, and thus we align our cultural consumption to that of that group; in other words, the higher one’s status the more highbrow the culture one would consume. Alternatively, we could think of cultural consumption as a means for individualization; in other words, one’s own self-​realization is as important as the role of social status in one’s consumption preferences. Lastly –​and this is the hypothesis that Chan and Goldthorpe champion –​ one could assume that the higher one’s social class the more diversified cultural consumption becomes. In other words, cultural consumption in higher social strata has a wider range, covering low-​, mid-​and highbrow forms of culture. At the same time, lower social strata are typically associated with narrower cultural consumption. Chan and Goldthorpe work with the omnivore/​univore allegory for their hypothesis:  that wider cultural consumption is classified as omnivore, quite literally consuming everything, while univores focus on one main form of consumption. To test their hypothesis, Chan and Goldthorpe use survey data from the United Kingdom on music consumption as well as a range of social variables. Their findings are summarized in Table 4.2. As we can see, the higher the social class, the higher the share of omnivores, while there are about 80 per cent univores in the lower social classes. In their quantitative analysis the authors conclude that that finding is largely driven by differences in education. All in all, their study shows that our preferences, as discussed above, can certainly reflect social conditions as much as our own private tastes and likes. Is a painting an investment? A similar intriguing question is posed by Mandel (2009), who tries to resolve the question of whether purchasing visual art is an investment or simply consumption. As we have seen above, the classification of characteristics in order to obtain a systematic analysis is very important in economics. However, in practice, classifying a product or service in one category or another is an empirical exercise. When it comes to paintings, 51

Cultural Economics

Table 4.2  Omnivore versus Univore Social class

Univore

Omnivore listener

Omnivore

Higher managerial and professional occupations Lower managerial and professional occupations Intermediate occupations Small employers and own-​account workers Lower supervisory and technical occupations Semi-​routine occupations Routine occupations

52.3

27.1

20.7

62.5

21.9

15.6

74.9 68.0

16.9 20.7

8.2 11.3

78.3

17.8

3.9

82.1 81.0

13.2 15.6

4.7 33.0

Notes: Numbers are sample percentages. The “Univore” group mostly listens to pop or rock music through media and rarely visits concerts, and then only pop or rock concerts. The “Omnivore listener” group listens to diverse genres (opera, jazz, classical, pop/​rock) through media, although concert visiting behaviour is still univore. The (true) “Omnivore” group listens to diverse genres through media and often attends concerts of various music genres. Source: Chan & Goldthorpe (2007), own adjustments.

economic theory is consistent with both options:  consumption and investment good. Paintings certainly are a means to hold value, and can be resold with a loss or a profit like any other investment vehicle. The only key difference from a stock or a share is that it is tangible. At the same time, paintings afford us pleasure and have several properties of consumption goods, albeit with a strong public element to them. That is, in essence, the idea of a museum: that you can consume art, if only temporarily. Similarly, if you hang a painting in your house, you can enjoy and thereby consume it any time you walk past it, and it would probably give you pleasure every time you see it. Mandel combines financial data with trade data of artworks sold across the globe in order to empirically answer the question whether art is an investment or a consumption good. His hypothesis is that, if art were more like a consumption good, it should follow fluctuations in the economy like any other normal or luxury consumption good, as discussed above. In other 52

Demand for culture

words, if we have a permanent rise in GDP we should also observe higher consumption of art. The key is that what is true for us as individuals –​our income rises and we consume more art –​is also true for the economy as a whole. Investments, on the other hand, are typically responsive to temporary changes in GDP. In other words, if there are temporary fluctuations in the economy, such as an upswing or downswing or a sudden shock, investment portfolios typically respond by restructuring portfolios. If art is part of that portfolio, we should also see a response in the share of art in total investments. We can see from Figure 4.3 that both trends are traceable in the data: there have been increases in US trade with the rest of the world in both paintings as well as consumer and capital goods. However, when going beyond eyeballing the results and performing a more rigorous analysis, Mandel finds that art exports are significantly and positively correlated with consumer good exports. In fact, Mandel finds an elasticity of 0.5 to 2, which translates into a 10 per cent increase in consumer

Figure 4.3  Trade in art: real US painting exports relative to other sectors, 1989–​2009 Sources: US export volume data are published by the US Bureau of Economic Analysis and the US International Trade Commission. Price series used as deflators are from US Bureau of Labor Statistics. 53

Cultural Economics

good exports increasing art exports by 5 to 20 per cent. For capital goods exports, however, the results are ambivalent, which leads Mandel to conclude that, in fact, art is more of a consumption than an investment good. Moreover, when linking art data to fluctuations in GDP, Mandel finds that a 1 per cent increase in real GDP results in a 3.4 per cent increase in art imports. This implies that art is indeed a superior good. At the same time, a 1 per cent permanent change in GDP results in a 24 per cent increase in art purchases, which, again, underpins his finding that art is more like a consumption good. All in all, we might conclude from this that the average art buyer is an art consumer. Nonetheless, there may be collectors who buy for investment purposes. Case study: Rijksmuseum in Amsterdam The demand for culture can also be used as a strategic tool by cities in order to enhance their reputation, as well as relying on cultural assets as a source of income as a result of local and international consumption. The Rijksmuseum in Amsterdam is an interesting case when it comes to touting and managing demand for its collection by tourists across the globe. Moreover, it is one of the few cases for which we can rely on a study to estimate the impact on the local economy attributable to the museum and the tourism flow it generates. In doing so, the Rijksmuseum has a distinct strategy to attract national as well as international visitors, with a comprehensive website and visitor-​friendly ticket options. The key result of the research by Booz and Company (2013) is depicted in Figure 4.4, in which we can see the continuously increasing impact the Rijksmuseum has on Amsterdam’s economy. This translates into employment in the museum itself as well as tourism-​related industries such as hotels and restaurants, and also into direct consumption spending in Amsterdam. The secondary impact of the Rijksmuseum is further analysed in Figure 4.5. There we see that the museum contributes to revenues from all types of visitors while a stunningly large share of revenues attributed to the Rijksmuseum comes from day visitors. This is indicative of the fact that the museum is a major magnet for visitors who dedicate a large share of their total visiting time to visiting the museum. 54

Demand for culture

Figure 4.4  Economic value of the Rijksmuseum to Amsterdam, 2003–​2017 Source: Booz and Company (2013).

Figure 4.5  Money spent in Amsterdam: Rijksmuseum visitor expenditure, average 2003–​2017 Source: Booz and Company (2013). 55

Cultural Economics

Summary • Willingness to pay is determined by preferences and elasticities. • There are three types of elasticities: own-​price, cross-​price and income elasticity. They each show how sensitive consumers are to changes in prices or income, respectively. • Highly elastic demand means high sensitivity to prices and marked decrease in consumption. • Products can be classified according to their elasticities, for example luxury goods. • Price setting is dependent on understanding consumer’s preferences. • Pay as much as you want schemes make willingness to pay transparent. • Art is a consumption good rather than an investment good although it carries properties of both kinds of goods. • Demand can be touted across the globe and act as a magnet for tourism, whereby culture boosts the local economy.

56

5

Artists, superstars and creativity

In this chapter we shall focus again on artists and their rationale for producing art. After all, artists are behind any cultural activity, and economic theory can offer some useful tools for understanding their motivations while empirical economic work can shed light on what we know from real life. Although Chapter  3 dealt with the many institutional factors that are relevant for artistic activity from a policy-​making perspective, we shall change perspective in this chapter to focus on the artists’ viewpoint and how their individual production decision depends on income potential, the bottlenecks to recognition in their particular sector and the labour market for artists more generally. One key element of the artistic labour market is the fact that, when thinking of any cultural sector, there is typically a set of artists who come to mind. And these usually are the ones who dominate their industry, not only in terms of their content and influence but also in terms of their income. These superstars, such as Ed Sheeran or Taylor Swift, J. K. Rowling or E. L. James, Lang Lang or Anne-​Sophie Mutter, are filling concert halls and captivating listeners’ as well as readers’ attention across the globe. At the same time, they are also the highest-​earning artists in their genre. And the link between top earners and superstardom can also be established in history, with Beethoven, Michelangelo and Shakespeare being the superstars of their time. However, there are, of course, exceptions to this rule, such as when we think of van Gogh, who never became famous during his lifetime. Nonetheless, for most cultural superstars it is a striking regularity that those who receive most recognition also earn the most. Moreover, we shall look at the various empirical studies, which shed light on the determinants of creativity from an economic perspective. In addition to the labour market dynamics there are various social as well as psychological aspects in artistic production that have achieved some 57

Cultural Economics

attention in economics. One such question is when artists reach their peak performance and what their career trajectories typically look like. Do artists shoot to fame when they are young or do they need to mature their talents in order to produce their best work? Again, this is mostly an empirical question, and we shall look at various studies dealing with these questions. Superstar theory Put simply, artists perform creative acts that, in turn, lead to reputation (Galton 1869) or some form of recognition in the market. We might call it fame or stardom at this point, to be consistent with Rosen’s semantics in his 1981 theory on superstars. His basic idea is that income distribution is very unequal in each sector, with some superstars at the top of the distribution making most of the money while all others fall far behind. The easiest way to understand the reasons for this is, perhaps, to think of the issue from a consumer’s perspective. If you could see the very best artist in a live show you would probably be willing to pay a lot of money for that. However, your willingness to pay for the second best artist is probably much lower despite, arguably, the quality difference between the two being probably not very great. In that sense, the best and second best artist are imperfect substitutes for you. What is even more surprising is that this effect gains traction the larger the market becomes. In other words, talent increases in value and the superstar effect is fortified, which means that income distribution becomes even larger. Figure 5.1 schematically depicts what the distribution of sales for a creative activity would look like according to superstar theory. We can split the distribution in two. On the left we have the short head, consisting of (a) the top sellers, the blockbusters and chart toppers of this world (which outperform the average market by far and earn a very high share of profits in the industry), together with hits and what is highly popular in the market. On the right we have the long tail, consisting of (b) a middle tier of what is still popular yet has far less reach and (c) the very long tail of niche products. Everything in the long tail of the distribution earns much less than the top tier. In that sense, sales as well as earnings are polarized and unequally distributed. 58

Artists, superstars and creativity

Figure 5.1  The long tail distribution of superstars

The winner takes it all Interestingly, what Rosen has offered in terms of theory seems to have a remarkable empirical reliability, as we find the above distribution in many industries. A very good example is the movie industry, in which a few films draw tremendous crowds into cinemas, followed by a decline in viewership even among the top movies, as depicted in Figure 5.2. The picture is even starker when we look at the US book market (Figure 5.3), in which the top title, For Whom the Ball Rolls by Dav Pilkey (number 7 in the series of Dog Man books), sold six times as many copies as the second most popular title. 59

Cultural Economics

Figure 5.2  Distribution of US box-​office revenues: top ten movies, 2018 Note: Movie revenues in the United States.

Figure 5.3  US book market: ten best-​selling books, week ending 26 August 2019 Note: Book sales in thousands of copies.

60

Artists, superstars and creativity

Figure 5.4  Some things never change: YouTube rankings according to subscriptions Source: Budzinski & Gaenssle (2018).

Lastly, we can also find a similar pattern when we look at the statistics for YouTube subscriptions (Figure 5.4). However, in the case of YouTube subscriptions or Facebook accounts we also have a network effect at play, meaning that any individual subscription becomes more valuable the more subscriptions there are. The same effect also exists in software and many other technologies. The tail: one-​hit wonders We would typically view one-​hit wonders as niche products that cater to a certain fad but that do not achieve superstar status over time, and therefore cannot establish themselves in the market more persistently. In that sense, one-​hit wonders seemingly defy the laws of the market, to shoot to fame and then disappear from the market again. However, as we can see in the statistics presented in Figure 5.5, the percentage of one hit wonders –​that is, the number of one-​hit wonders as a share of all songs in the charts –​is relatively low, with a maximum of around 10 per cent at any given time. More often than not these are artists who have added diversity to an existing music landscape that otherwise is dominated by superstars.

61

Cultural Economics

Figure 5.5  One-​hit wonders in US charts, 1900–​2008

Working for a living: artists’ labour markets If we look at the nature of cultural markets, it seems that labour markets for artists are particularly competitive, especially at the top end of the market. However, the creative industries also have the advantage that they are relatively broad, as a result of the many forms of differentiation in terms of products and limited substitutability for customers. On the one hand, entering an artistic occupation in the first place is a rather risky endeavour, if we look at the low chance of success and the income distributions. In comparison, the average labour market has a much smoother income distribution, with only small variation in wages. In other words, it is highly unlikely that you would find a doctor or a teacher who makes 20 times what his or her peers make, whereas this is the standard case in the cultural sector. On the other hand, if we think of intrinsic motivation next to the external monetary rewards for artistic activity, one could argue that there are many things more satisfying then being creative and producing culture. It is often in the uniqueness of each performance and each song that there is value creation beyond the market reward (Throsby 1994). This is consistent with the fact that artists earn less on average than those in other lines of work (Frey 2019). At the same time, however, employment 62

Artists, superstars and creativity

contracts as well as access to social security are long-​term issues in many countries. Nonetheless, it is rather difficult to apply supply and demand logic to all cultural sectors, as labour markets are organized so differently depending on the art form. So, although it is hard to discuss wages and remuneration for artists across the board, there are some features of artistic work, such as work location and working conditions, that we can shed light on. Location matters We know that famous artists usually do not operate in isolation. On the contrary, they usually exchange thoughts and ideas with others, and thus become better themselves. We can think of this as a peer effect, whereby artists benefit from each other’s ideas and techniques and general know-​ how. This idea is called knowledge spillover in economics, and there is empirical evidence for such spillovers in many areas: (a) high school education (smarter class mates will help you be a better pupil: Hoxby 2000); (b) college dormitory mates (the same idea as for pupils: Sacerdote 2000); and (c) scientists (if a star colleague suddenly dies, the research productivity of the team drops: Azoulay et al. 2010). In many activities, physical proximity is crucial for making such spillovers work. The idea behind this is that knowledge is typically best exchanged face to face, especially the kind of tacit knowledge that is hard to obtain from a distance. And with regard to historic creative production, location and, thereby, access to other creative minds mattered even more because of the difficulty of communicating and travelling. Nonetheless, even today many of the “big five” technology firms (going under the acronym of FAANG:  Facebook, Apple, Amazon, Netflix, Google) have relatively few remote working or telecommuting options, exactly for that reason. Proximity in one location fosters exchange between colleagues, thus stimulating creativity and innovation. The actual locations where spillovers usually take place are referred to by economists as creative clusters, or agglomerations –​that is, locations where many representatives of the same sector work together. And there are many in the creative industries; think, for example, of Hollywood for movie production, Broadway for musicals, Silicon Valley for tech, or Nashville for 63

Cultural Economics

country music. Thus, it seems no coincidence that any actor who wants to make it heads to Hollywood, as this is apparently the place to be. In other words, producers and gatekeepers in an industry usually co-​locate in the same place as they share the same incentive to be near the action of their particular sector. In one of my own research papers (Hellmanzik 2010), I find that Paris and New York are by far the most important clusters for modern art. As Panel (a) of Figure 5.6 shows, in Paris’ heyday around 50, or 23 per cent, of the most important painters lived in the city at that time. Similarly, New York hosted 13 per cent of all famous artists at the time during its peak in 1945 (Figure 5.6(b)). Moreover, paintings that stem from a period when modern artists lived in New York or Paris are typically more valuable than paintings made elsewhere. In my analysis, I  find that this is mostly driven by the extremely high quality of peer artists in those locations. The mark-​up on the price is 43 per cent for paintings made in New York and 11 per cent for paintings from Paris. And, lastly, I find that artists who work in one of the clusters do actually produce their best works earlier in their careers. This is what is depicted in Figure 5.7, where we can see that the average artist living outside an artistic cluster produces his or her peak work at the age of 35, whereas New  York painters reach their career peak at the age of 32 and Parisian artists at 28. Economics of creativity When we are talking about artists, in many ways the literature in economics, psychology and some of the humanities is threaded around defining what it is in artists that makes them so special. We find a lot of research about genius artists and about their originality, and, ultimately, a lot of effort is put into trying to put a finger on the source of these unique artistic features. It is undoubtedly very hard to explain where talent comes from and why it is distributed so unequally across society and across time. After all, it seems that there can only be so many Mozarts, Kants, Rembrandts or Hendrixes.

64

Artists, superstars and creativity

Figure 5.6  Number of famous modern painters: (a) in Paris, 1880–​1995; (b) in New York, 1900–​1995 Source: Hellmanzik (2010).

65

Cultural Economics

Normalized log sale price

1.0 0.9 0.8 0.7 0.6 0.5

15

25

35 45 55 Age at which painng was executed Paris Other locaons

65

New York

Figure 5.7  Career curves for modern artists Notes: Age–​price profiles were estimated using a hedonic regression model. Prices are normalized at the respective location maximum. Source: Hellmanzik (2010).

At the same time, however, we can certainly understand which factors are conducive to creativity. Put differently, although we have a hard time ­capturing nature, we can observe the nurture of artistic talent. Usually we do this by analysing those top artists who “made it” and test possible explanations for their creative output. In other words, we demystify what seems to be beyond comprehension factor by factor, namely the determinants of creativity –​that is, those forces that are conducive to creativity and artistic production. One of the main researchers on this topic is psychologist Dean Simonton, who has dedicated much of his work to understanding creativity and the dynamics of artistic production. One aspect in his work is how the innovation process is influenced by our psyche, our training and our social life. To this end, Simonton has studied the careers of scientists as well as artists in order to compare various patterns of innovation and the depth and breadth of knowledge necessary to innovate (e.g. Simonton 1988, 1997).

66

Artists, superstars and creativity

Moreover, there are various researchers who analyse distinct aspects of creative production in several sectors. In the following I will highlight some of those works. Democracy. By and large, economists have provided ample evidence –​ both theoretically and empirically –​for the fact that democracy provides an ideal platform for economic activity of any kind. Why? Because, of all the possible political systems, it is the one that is most likely to guarantee safety, civil freedoms, equality and incentives for education and innovation, as well as production more generally. Moreover, we know that democracies offer higher wages (Rodrik 1999) and enhance growth (Barro 1996), whereas non-​democracies usually produce lower human capital accumulation rates (Aisen & Veiga 2011) while blocking competition, which leads to higher than necessary prices (Mulligan et  al. 2004; Mulligan & Tsui 2006, 2008). In terms of artistic production, the works of Frey (2020), Naroll et al. (1971) and Vaubel (2005) find that freedom, diversity, and institutions (as shown in Chapter 3) play a big role for artists. In fact, many of the social sciences argue, too, that what happens in society at large has a big impact on artistic potential and expression. In my own research (Hellmanzik 2013) on the impact of political circumstances on artistic production among painters, I also find evidence about the conducive effect of democracy for a global sample of modern painters:  that paintings produced during relatively democratic times fetch higher prices in the art market. Moreover, democratic countries host more artists and have a higher level of artistic capital. Well-​being. Borowiecki (2017) analyses the language used in 1,400 letters written by Mozart, Beethoven and Liszt to obtain a measure of the composers’ emotional state. To this end, the author uses sentiment analysis to identify the moods and well-​being across their careers. Borowiecki’s key finding is that sadness is positively linked to composing activity; in other words, in periods of sadness, grief or depression, composers write better pieces than in periods of positive emotions, as captured in their letters to their peers. Bereavement. Graddy and Lieberman (2018) have studied the impact of the sudden death of a family member or a close friend on creativity, the question being whether or not periods of grief inspire artists to produce

67

Cultural Economics

better works or whether they result in poorer-​quality output. To answer this question, the authors looked at a sample of American and French modern painters and their auction results as well as the collections of some important art museums. They find some evidence for a negative link between bereavement and creativity; in other words, works that are painted in the year a family member or a close friend of the artist died are less valuable than paintings made during other periods of the artist’s life. This finding is confirmed by the choices of museums: paintings from bereavement periods are less likely to be hung in major art collections.

Case study: discrimination in artistic labour markets In virtually all the arts, women seem to be under-​represented. No matter whether we talk about classical or pop music, sculpture or painting, novels or poems, the majority of artists seem to be men. Of course, the proportion of women varies, and times are changing, but this observation is nonetheless worth making in its own right. Thus, it is no wonder that, in quantitative, empirical studies on historic and contemporary artistic activities, we find a shockingly small number of women in the samples. Obviously, there are many explanations for this, but by and large it seems to be hard to believe that talent is distributed in such a skewed way across the population. It is statistically relatively improbable that the average creative person is a white male. So, although there are a few female shining stars among historic writers, painters and composers, such as Frida Kahlo or Grandma Moses, or the Brontë sisters or Jane Austen, even so the numbers show that the cultural history back catalogue, as well as contemporary cultural production, is to a large extent dominated by male artists. Of course, when thinking about historic artistic production we can find a host of institutional factors that could explain the lack of superstar women. But when it comes to today’s debates about the role of women in the arts it does not seem to be a stretch to assume that there is a certain degree of discrimination against women (and against minorities) in the arts. As so often is the case, theory does not really offer much in terms of being able to explain why there is discrimination against certain groups in 68

Artists, superstars and creativity

society –​especially in the arts, for which productivity differences between men and women should be negligible if they exist at all. However, empirical studies can help assess whether women are in fact discriminated against. And providing hard evidence should, hopefully, pave the way to addressing the issue. Goldin and Rouse (2000) –​two female economists –​deal with the very question of gender discrimination in their research paper, which is, fittingly, titled “Orchestrating impartiality”. The authors looked at classical orchestras in the United States over time, and used the fact that many changed their hiring procedures from open auditions –​the artist sits visibly on the stage –​to blind ones in the 1970s and 1980s, at which the artist is behind a screen and thus the jury can rely only on the audible quality of the performance. If the jury was indeed impartial, the shares of women hired should not change with the change in the hiring procedure for orchestra members. In contrast, if there had been any anti-​female bias, the hiring of applicant women would be lower during open auditions than in blind ones, for the reason that blind auditions render discrimination very difficult, if not impossible. As a result of this special feature, the hiring process for classical orchestras lends itself very well to an analysis of gender discrimination in the arts (and, of course, beyond). Goldin and Rouse (2000) looked at data for eight major US orchestras from 1950 to the 1990s and collected data on 7,065 musicians in 588 audition rounds (auditions were run in preliminary, semi-​final and final rounds). As musicians often attended more than one audition, we have a very good chance of capturing the “real” effect of the introduction of blind auditions in this set-​up and making sure we are not picking up on other factors in the analysis. When looking at the gender distribution in American orchestras, as depicted in Figure 5.8, we see that, although the share of women increased substantially and steadily after 1950, it had still reached only around the 20 per cent level in most of the observed orchestras by the early 1990s, with the exception of the New York Philharmonic Orchestra, for which it reached about 35 per cent. This statistic alone may lead us to think that there is some discrimination in orchestras’ hiring processes. The crucial question now is whether the rise in female orchestra members is attributable to the fact that there were more female musicians over time, that they simply had become better or that the change to a blind audition system did indeed impact the chances of women being hired. 69

Cultural Economics

Figure 5.8  Share of women in selected US classical orchestras, 1940–​1995 Notes: “BSO” = Boston Symphony Orchestra; “CSO” = Chicago Symphony Orchestra; “NYPO” = New York Philharmonic Orchestra. Source: Goldin & Rouse (2000).

In their analysis, Goldin and Rouse find that blind auditions do indeed reduce gender bias in the hiring process. In other words, women really are significantly more likely to advance into the next round of auditions. In fact, their chances in the preliminary round increased by 11 per cent, while their chances of reaching the final round increased by 30 per cent. Moreover, the analysis attributes 30 per cent of this increase to the introduction of blind auditions –​that is, the reduction of possible bias against women in the hiring process. As such, the study provides empirical evidence for discrimination against women in the arts. Summary • Culture is a winner-​takes-​all market. A few superstars make most of the money in the market. 70

Artists, superstars and creativity

• This pattern holds in theory and across industries and is reinforced by technological progress as a result of increasing market size. • Labour markets are subject to the superstar phenomenon, and earnings are riskier than in other sectors. • Cultural industries are often subject to agglomeration effects, and artists benefit from peer effects. • Political as well as personal circumstances impact artistic productivity.

71

6

Quality in the arts and culture

Quality is a tricky topic in the arts and culture. In essence, in this chapter we will explore economists’ answers to the following questions. Is there such a thing as objective quality in culture? And, if so, how do we know what constitutes a good artwork? A good book? A good dance? Personal and diverse though preferences may be, there also seem to be some agreed measures of commercial as well as critical success. And, given that these are usually measureable and observable, this is often what economists turn to when looking to quantify quality. Now, of course, one could discuss at length whether commercial success is a marker of high quality. There are many instances when audiences and critics have been divided: consider the success of the book Fifty Shades of Grey, for example, or Hirst’s shark in a tank. Both were critically panned, but, if millions of readers were willing to invest their time reading or collectors were willing to pay large sums to own the tank, they could not possibly be wrong –​could they? After all, who is to judge anybody’s taste in the arts? In many ways, markets are liberal and morally neutral, because consumers can simply vote with their feet or wallets by choosing to buy certain products and services. However, there is a vast strand of literature in philosophy dealing with aesthetics. The key questions here relate to how people form aesthetic appreciation and how individual preferences are aligned and negotiated in arriving at a common understanding of aesthetics. After all, there are universal ideals, such as the “golden ratio” in art, according to which a painting is composed, or the aesthetic ideal of symmetry. Since the eighteenth century philosophers such as Alexander Gottlieb Baumgarten, David Hume, Edmund Burke and Immanuel Kant have occupied themselves with the nature of aesthetical judgements and how these

73

Cultural Economics

judgements differ from rational or moral judgements. According to Kant, we can say that an aesthetic judgement has two characteristics: it combines the subjective, private assumption that something is beautiful with the claim that this assumption is generalizable. So private preferences for cultural goods and services are linked to public and social assessments by means of aggregation or common agreement as to what constitutes culture, and what is to be considered beautiful or valued as a piece of art. In order to obtain a better understanding of these market mechanisms it is important to understand the role of “taste makers” in cultural industries. These are agents who influence the market and the key dynamic between demand and supply. These taste makers have a key role in channelling what makes it to the market, how we perceive it and how that has changed over time. After all, in virtually every cultural sector there are experts, namely the many curators, critics, agents, talent scouts and so on who decide which artists will be given the opportunity to market their creative output to a wider audience. It seems obvious that such gatekeepers to the market have some decision mechanism by which they decide what they deem good and what will receive market exposure by ways of airtime, performance time, wall space and so on. Then again, with advancing technology and greater direct access by artists to consumers, these gatekeepers’ influence might change. The most obvious examples are SoundCloud, YouTube and Instagram, whereby artists can “bypass” traditional market mechanisms so as to broker their talent directly to the market. As consumers, we often look for guidance on how to spend money and time when it comes to cultural consumption. And this is where the question of quality is most pressing –​as most are experience goods and services, and we want to reduce our risk of wasting time and money on a product or service that we do not enjoy by obtaining information upfront. These sources of information are largely how we determine quality ex ante, and perhaps also during and after consumption. Needless to say, there are a host of experts on the producer side of things who spend time and effort in signalling quality to the market. Another important aspect in assessing quality in culture is the role of time and dynamics in the development of tastes and perceived quality, as these are typically not stable over time. There are art forms, such as hard-​ core techno music or silent films, that are appreciated only in their own time, and either lose their attraction over time or are just forgotten. Some 74

Quality in the arts and culture

are of recurring interest, driven by online fads and changing cultural tastes. The most obvious example is probably that of fashion, for which trends come and go, and often reach back to the past. It seems that the internet now fuels the pace of these cycles, and it is probably down to the novelty effect for each new generation, driving the demand for these retro trends, rather than their quality or innovativeness per se. Nonetheless, the “nose” for such trends, and translating fashions into new contexts accordingly, thereby creating innovation in design, certainly adds new quality to fashion, making it more than simply a copy of the past. Hence the enduring appreciation and market for vintage and retro cultural products. In what follows I  discuss measures of quality and success in the arts, using prices, expert and peer opinions and awards as metrics for quality. It is one of the most controversial topics in arts and culture, but the following discussion sheds light on some of the tangible facets of quality in culture. In short, we can summarize the dimensions of quality assessment discussed in this chapter in Figure 6.1.

Figure 6.1  How do we know what good culture is? 75

Cultural Economics

The merits of quantification and rankings When it comes to quantifying quality in connection with cultural goods and services, we first need to agree that it is possible to order levels of quality in the arts in a meaningful way. In other words, when we look at how a book is ranked on Amazon or how many points a team scored in “Dancing with the Stars”, we are implicitly working with two underlying assumptions: (a) more is better –​that is, we believe that the more people deem a product to be good, by whichever means of assessment is used in the sector, whether by box-​office sales or IMDb score, the better the product is; and (b) the higher the rank the better the product –​that is, we believe that a higher-​ranked performance is better than one with a lower score. Ultimately, this implies that there is some underlying consensus in ranking, with which we can assess quality of the arts. Although it is perhaps somewhat distained by the arts, the essence of ranking is deeply ingrained in economics. After all, if we prefer A to B, it must mean that A is valued more highly by us than B. This implies that we should be able to rank A and B. If we can aggregate everyone’s preferences, by their purchasing behaviour, we would obtain a ranking of what everyone values. Similarly, of course, we can construct a comparable argument from the performance side by means of prizes won, accolades achieved and the number of positive reviews on Amazon. The simplest application is probably music charts or book best-​seller lists, in which the inherent logic implies that a higher position in the table means that the song or the book is faring better than those placed lower. In these disciplines we have clear markers for quality –​that is, commercial success as reflected by record or book sales or box-​office revenue. So, even though we might not agree that box-​office revenue is a good metric for the artistic quality of a film, it at least is an indisputable metric of success in the market. However, for economists these metrics are valuable as they reflect what people are willing to pay for –​that is, their revealed preferences. Whether what is sold is good or not when it comes to artistic qualities or content is a question that economists leave to the respective disciplines dealing with the subject of the individual piece in depth, such as theatre studies or art history. In fact, many research pieces quoted in this book largely rely on the insights from these other disciplines to design their empirical studies. 76

Quality in the arts and culture

The issue of rankings and capturing the quality of cultural products and services becomes harder when an objective measure of quality is difficult to find. To use the arts market, for example, one might argue that the best works are those that are selected by curators to be displayed in their museum’s collection. If we believe this assumption to be true, what metric would we want to use to quantify quality in visual arts? The number of pieces by a respective artist in the collection? Total wall space? Years displayed in an exhibition? Or would we consider the number of visitors per year, to approach the issue from the demand side? Or, coming back to the auction examples earlier, the highest bid for the painting? If we produce rankings of artists based on any of these metrics, the message is perhaps less clear-​cut, as there are different dimensions from quality, in addition to the various dynamics at play. Thus, the outcome of the ranking might largely depend on the metric we choose. In such cases, a quantitative quality assessment is only ever going to be an approximation to what the true quality is. Markets: the more the better? If you want to signal to a possible consumer that your product is high quality, you have three options: marketing, a high price and word of mouth. For all these options we have to distinguish who is in control of the quality signal, as there are only so many that the artist or his or her agency can directly control; others are deduced from the market or the aggregate of consumers directly. As for most art forms, we are in some form of monopolistic competition, with artists competing for success and attention by means of their quality. And this dynamic exists along the entire range of very diversified products. We must also consider that this dynamic is ingrained in cultural products and services, as they are an experience good and typically subject to imperfect information. In such an environment, potential consumers need to extract much information from the price. As they cannot know the “true quality” of the product or services they can only assume that higher-​quality products are more expensive to produce and therefore sold at a higher price. Moreover, there is a lot of information available to consumers about the quality of a product, which is largely costless but still influences their perception of quality. 77

Cultural Economics

If we take the film industry, for example, big blockbuster movies with big budgets and top-​paid actors have a large marketing apparatus to persuade us to go and see them. If a film receives rave reviews by movie critics as well as from audiences –​IMDb ratings –​in all likelihood it is going to be successful and make a lot of money. Ultimately, such a movie might also win at the Oscars, reflecting critical acclaim and thereby ticking all the boxes of success and, implicitly, quality for the market. At the same time, there are a range of independent films and small-​ scale productions that coexist in a different niche of the market. Thus, they are competing for viewers’ attention, even though they are competing in a different niche with different rules. This reflects their typically smaller budgets and resulting market reach, but is also a result of the fact that the quality signals are different. Winning a Palme d’Or at the Cannes Film Festival can signal either high quality or that the film deals with a topic in a non-​conventional way. One such example could be the French movie hit Les Intouchables from 2011, which combines the topics of disability and ethnic heritage and became a global success with audiences and juries despite having been made on a budget of only US$10.8 million. A film from the same period, The Social Network, out of the Hollywood stable had a budget of US$50 million, to put this in perspective. As movie tickets and DVD prices are typically standardized, this is not a market in which artists compete on price. Customers typically pay the same for Spider-Man: Far from Home (2019) as they do for a small, typically non-​US production, such as Call Me by Your Name (2017). Art pieces, on the other hand, do compete on price, when we think about the auction market, for example, or galleries selling art works. In such a market, prices signal quality as well as becoming a strategic means to broker the market. One interesting phenomenon to illustrate how this works in practice is the way in which auction houses bundle paintings in lots to be sold at auction. These lots often contain various items of diverse quality, and, by lumping them together and playing into buyers’ sentiment during the auction, quality and desirability are suggested by the mere strategic placement of these items. Following this logic, the best and therefore most highly valued painting is put up for auction first and is expected to fetch a higher price in the market, while subsequent paintings tend to sell for less relative to the valuation of the auctioneer. This is known as the “afternoon effect”, as discussed in Beggs and Graddy (1997). 78

Quality in the arts and culture

Quality is hard to capture, and, even though there probably is something that might be termed a “true quality” in each cultural product –​some endure for centuries and never lose in appeal –​it is hard to capture it. There are many unobservable factors that contribute to success and determine tastes. However, many economists believe that we can get close to capturing what is high quality and what is not by using quantification, which controls for characteristics of goods and services, and by observing market mechanisms, which controls for the organizational determinants of production as well as consumption. At the same time, economists do acknowledge that, even when we observe straightforward market mechanisms such as an auction, there are still random, sentimental or purely strategic factors at play, affecting quality assessment by experts and consumers alike. Other consumers’ assessment: how many stars shine on Amazon? In many ways, our choices of cultural products and services for consumption are dependent on what our friends and colleagues are doing. After all, culture is a social phenomenon, and what we do and consume is largely shared with others and is part of our identity. So, if we hear from our friends that a certain movie or series is great, it increases the likelihood that we will also watch it. Such word of mouth plays an important role in taste formation, but it also helps us navigate and select the cultural experiences that suit us. Word of mouth or peer assessment guides us in our private quality assessment of cultural products and services. Nowadays a lot of these word-​of-​mouth assessments happen online and largely come from information sources that we do not know –​thus, they are not a source of direct social pressure on taste formation, as in the case in Chapter 4 –​and that are aggregated by the various platforms and social media more generally. This is why they are so powerful in aggregate, as they filter our perception of what is worth our attention and what is good in markets in which information is fuzzy. However, these aggregate opinions often need to be discounted by the fact that the sources and their taste matrix are not known. There are some typical features of the word-​of-​mouth effect. One is that sales immediately after release are typically high and, after reaching a peak, wane over time until they converge to a low and steady sales volume. 79

Cultural Economics

Figure 6.2  Sales after release in the German book market, 2003–​2004 Source: Beck (2004).

Figure 6.2 illustrates the sales dynamic after release for two representative book titles in the German market in 2003/​4, as studied by Beck (2004). We can see that both titles exhibit strong sales growth right after release and reach an early peak in sales shortly afterwards. After that sales volume wanes markedly, with some odd spikes as well as seasonal sales spikes before Christmas. Expert assessment: the jury is still out Lastly, we have the option of relying on experts for their assessment of what constitutes quality. Music competitions are a good example of such expert opinion and its influence on performers and the arts more generally. After 80

Quality in the arts and culture

all, experts, judges and curators are the ones who decide who wins in the competition for quality signals to the market. Culture relies heavily on competitions and prizes and other forms of selection by experts to separate the wheat from the chaff. In other words, in a world where information on quality is difficult to obtain, we rely on experts to pre-​select what we direct our attention on. One of the crucial assumptions for the importance of experts is that they have an ability to assess quality in culture that is superior to the customers’. They have an important role in mediating which artists make it in the music industry or the art world, for example, and what companies as well as consumers will spend their money on. Galenson and Weinberg (2002) compare the various avenues of quality assessment for art. In essence, their question is whether experts deem the same works to be good as the market does. Their main goal is to use quality, as measured by auction prices, to analyse how a modern artist’s career develops over time and when artists such as Picasso and Monet produce their best work. In order to understand why the prices fetched at auctions a long time after the artist’s heyday make a good measure of quality, they compare scholars’ assessment of artists’ quality to prices. After all, if experts deem paintings from a certain period of an artist’s life their best work and these paintings also fetch the highest prices, one could conclude that experts and markets arrive at the same conclusion on quality. For this exercise, Galenson and Weinberg compare art history textbooks, exhibitions of modern art and auction results. They find that highly priced works are also the ones that are to be found in museums and are prominent in textbooks. Thus, we might infer that what is true for visual art might also be true for other art forms: experts and markets largely concur in their assessment of cultural products and services. Ginsburgh and van Ours (2003) also assess the role of experts in the cultural process, studying the Queen Elisabeth Competition. During the competition pianists have to play various pieces with and without orchestra, and one novel piece that is unknown to them before the competition. This competition is considered highly prestigious, and many famous piano players, such as Boris Giltburg in 2013 and Anna Vinnitskaya in 2007, have successfully participated in the competition, or even won. As the overall score of pianists’ performances in the competition depends on the jurors’ expert assessment of the candidates, it is important to understand whether their 81

Cultural Economics

vote reflects the true quality of a performance or whether they have their own agenda –​independent of the pianist’s quality –​and therefore influence the outcome. In order to check whether judges are in fact impartial and assess quality only, Ginsburgh and van Ours checked if the order in which pianists played matters for their decision. If experts make decisions solely on the basis of the quality of the performance, it is fair to assume that the order in which performers appear should not influence their verdict. The authors find that arbitrary changes in the order of appearance do indeed influence experts’ opinions, which is indicative of the fact that experts’ opinions reflect more than mere “objective information”. This is what economists call sequence order bias –​that is, the sequence of performances matters to experts when it should not. More recently Collins et  al. (2019) find a similar bias for experts judging performances on the television show “Dancing with the Stars”. There, later performances score better than earlier ones, which the authors refer to as “grade inflation”. In other words, in the beginning jurors give average to good grades, and if they are excited or convinced by later dances they tend to give even better grades. This is possibly fuelled by the atmosphere in the studio, which spurs the jurors to go on and give grades that are better than the initial ones. And the artists themselves? When it comes to quality, of course, artists’ self-​perception might be very different from what markets, experts or fans think. This becomes apparent when we think of the many pop stars who tour the globe with fans wanting to hear the same songs over and over again rather than new material. After all, those “evergreens” are what made the musician famous in the first place. However, from a quality point of view, the songs that shaped the brand of the band or singer are sometimes not what the artists themselves hold in high esteem. One such example is R.E.M.’s Michael Stipes, who has claimed not to be very fond of the band’s song “Shiny Happy People”, declaring in 1995 that he hated “that song”. The song did not make it on to R.E.M.’s first Best of album, and the band refused to play it live, despite fans’ fondness for the song and its commercial success. And there are several other cases of famous artists, 82

Quality in the arts and culture

such as Madonna, Kanye West and Frank Sinatra, being unhappy with their own material. Once the artistic product is in the public arena, artists themselves might lose agency over the song or the painting, and audiences, critics and  –​ indeed –​the market begin to shape the artistic product in their own way. After post-​production and release artists’ control and agency over their product declines. So, despite the fact that Madonna’s image was greatly shaped by her early hit “Like a Virgin” and listeners largely associate her with that song, Madonna, in fact, dismisses many of her older songs (McAlpine 2018). Interestingly, audiences’ perception of an artist’s material also changes over time and with growing repertoire and competition. However, these two opinions might not necessarily move in the same direction, leading to a market mismatch between artists who have grown tired of their old material and fans coming to hear those very songs and perhaps not caring as much for the artists’ new records. One can only speculate whether the increase in live performances in the music industry has shifted power to the demand side, thereby prompting bands and singers to play more of their old material to pander to ticket sales when proceeds from live shows become an ever more important source of income for artists in the music business. It is easier to judge the dead: assessing historic artists’ quality In many ways it is easiest to assess genius posthumously. One of the reasons for this is that productivity and its quality at that point is a fixed quantity; dead artists do not produce new works that can change our perception of their oeuvre. Moreover, one of the great advantages of assessing artistic quality posthumously (or after the artist’s active career) is that we have a different perspective from which to judge creative works. As time passes, quality evolves as a concept. For example, there are a few one-​hit wonders who have certainly made an impact in the year of their song, installation, performance or play, but their lasting impact on their art is, in all likelihood, relatively small. On the other hand, there are other artists whose contributions to their genre endures and inspires artists for generations to come. If we compare Gotye’s song “Somebody That I Used to Know” –​a stunning worldwide success in 2012 –​with Adele’s “Rolling in the Deep”, which was released at the same 83

Cultural Economics

time, it is fair to say that Adele’s success, reach and impact on the music industry has been much wider and more consequential. It is very likely that this is attributable to some difference in quality, or, at least, an ability to produce consistently high-​quality output across an artistic career. In other words, hindsight is helpful in assessing the lasting impact of a work, which certainly is one important aspect of quality and why we hold some artists in higher regard than others. If we consider historic artists, we usually have a long time window between the artist’s works and quality assessment, which makes any judgement of quality much easier. And such assessments are typically done in the canons of the respective fields: the list of who is important, who has made an impact and who produces top-​quality works. We might even call these the superstars in the field, and every field has some common understanding of who these are. It might be Frida Kahlo for visual arts, Anna Pavlova for ballet, the Beatles for music, or Goethe for literature. In this sense, history reveals quality in a way that contemporary market mechanisms or peer and expert assessment cannot. And this is why we typically refer to the canon –​which might also be subject to change over time, although we would hope that canons are more stable over time than markets  –​as a benchmark for lasting quality and impact. Thus, it is no surprise that many artists are benchmarked against the great heroes and heroines of their field. A statement such as “She is a great artist but she is no Leonardo da Vinci” perfectly reflects that sentiment. Case study: taste is fickle and hindsight is the real deal There is one important study in cultural economics that deals with the “half-​life” of culture and therefore contributes to answering the question as to whether or not tastes and preferences survive over time, and therefore whether high-​quality culture survives over centuries. Ginsburgh (2003) asks in his paper whether music, books and films endure the “test of time” (an expression the author adopts from the philosopher David Hume) –​that is, whether positive contemporary assessment results in long-​term reputation. His main assumption is that only those cultural products and services that survive the test of time are of high quality. 84

Quality in the arts and culture

To this end, Ginsburgh obtained information on expert assessments of artworks immediately after their production, a market measure of success such as (box-​office) sales and a long-​run measure of success (best movie/​ book/​song of all time verdicts). When running his estimations, Ginsburgh controlled for product characteristics to make sure that he picked up the link between recognition and market success, controlling for other factors only by means of his model. Put differently, his findings hold true for the average cultural product in each category and not necessarily for each individual observation. He finds that, on average, prize-​winning movies also are box-​office successes while prize winners in classical music subsequently become more successful in the market, as measured by the probability of securing a record deal. According to Ginsburgh’s study, this is not the case for the book market, in which prizes do not impact books in the same way; for example, none of the Pulitzer Prize winners or nominees made it to the US best-​seller list in the 1980s. However, a more recent statistical analysis of the effect of the Booker Prize on book sales reported in The Guardian and based on Nielsen’s data shows that Booker Prize winners indeed sell more books after winning the award. Hilary Mantel’s success in 2012 after her novel Bring Up the Bodies had been awarded the prestigious prize is quoted as an example of such a spike in sales after an award. Although such a statistical analysis does not have the same rigour as Ginsburgh’s paper, the findings are still supportive of the fact that the link between critical acclaim and market success exists in the book market as well, though there is no significant evidence for this effect presented in Ginsburgh’s paper. However, this might be because of data issues, or simply because the samples considered are very different. In sum, Ginsburgh claims that there is a relationship between awards and success across these markets: that experts influence market outcomes. Interestingly, the relation between contemporary expert opinion and hindsight’s assessment of historic art works is very weak. This is indicative of the fact that expert opinion does not survive the test of time, whereas high-​quality products that persuaded markets usually survive and usually convince experts later in time. The best example of this “delayed expert recognition effect” is probably 2001: A Space Odyssey, which was not even nominated for an Oscar in 1968 but which is now considered one of the greatest movies of all time. 85

Cultural Economics

Summary • Objective quality in culture is hard to capture, yet approximations to what true quality may be often inform consumers’ choices. • Market success is indicative of contemporary quality, as assessed by consumers’ willingness to spend money and time. • As cultural goods and services are experience goods for which we do not know quality until we have consumed them, we rely on experts or peers to make a consumption decision. • Experts’ assessment is highly relevant as a bottleneck to the market. Whether it is always able to capture “true quality” is debatable. • Typically, sales are high immediately after release and wane over time. This is attributable to information cascades. • Truly high-​quality art and culture survive the test of time, meaning that they are still held in high regard long after their production.

86

7

The organization of cultural industries

Industrial organization provides us with important insights into how the properties of the good or service in question characterize the market, its prices and quantities sold and how firms compete with each other. Building on Chapter 2, we can examine the tools with which the market structure is analysed and the role industrial organization plays in the creative process and the position of the artist in the market. We could start by asking the simple question:  why are there firms in the cultural industries at all? The famous economist Ronald Coase argued that a firm is simply a way to bundle transactions that happen in a market and thereby reduce participants’ transaction costs. A singer could negotiate publishing, copyright and pricing for each song individually and for each listener separately, but that would be inefficient in terms of allocation of his or her time and would probably involve high administrative costs. In that sense, purchasing cultural products and services are different from buying a carton of milk, as cultural products are non-​standardized and contracts over their exchange between two parties are not as simple as exchanging a carton of milk for money. Thus, the role of the firm in the cultural industry is to mediate between market participants: creators and consumers. Firms thus bundle many interests into one legal and economic entity. On the supply side of the market, we have two parties:  the producer/​ agent and the artist. The relationship between the firm and the artist often depends on the sector we look at and the bargaining power of the artist. For example, a more famous artist will have more weight in a negotiation for a record deal than an unknown young band. On the other hand, if we think about the big three in terms of private products and services in the cultural sector –​namely books, movies and television –​typically a handful of large producers dominate the market, which have a lot of power over the terms of the market, such as pricing, pay and the selection of “talent.” 87

Cultural Economics

Thus, in this chapter we will add a strategic dimension to our under­ standing of cultural industries. As these are particular to industries with more than one supplier, I  will focus on the large non-​public cultural markets: books, music, television, movies and art. Of course, one can apply the same set of tools to theatres, festivals, opera houses, ballet companies and orchestras. However, as their organization and financing are often intertwined with public and/​or institutional factors, the concept of market power needs to be adjusted to take these into account. Thus, I will not go further into the study of these. Concentration in the creative economy In order to better understand the key features of cultural industries, we want to use a simple metric for calculating industry structure as well as looking at some real-​world data. In Chapter 2 we discussed the various forms of competition and what they mean for a firm’s ability to set prices, for example, in the market. Moreover, we have discussed the fact that many sectors of the cultural industries are in fact organized as oligopolies (few firms competing) or monopolistic competition (many firms each selling a slightly different product). This is attributable to the fact that cultural products are highly diversified experience goods. We shall expand our analysis now by taking a closer look at a tool for measuring how concentrated the industry is within this competitive structure. It makes a big difference in terms of price-​setting powers as well as quantities supplied if we have two main players in a market, with many small ones competing at the margin, or if there are five or six large ones competing with a more or less comparable market share. The tool economists like to use to measure industry concentration is called the Herfindahl–​Hirschman Index (HHI). It measures how large firms are relative to the total industry size, and therefore is an often used indicator for the level of competition in a sector. It is defined as follows:

88

n

2

HHI = å market � sharei i =1

The organization of cultural industries

To look at this formula in more detail: there are n firms in the market, each of which has a certain market share. Each firm is denoted with i. If we take the sum of these market shares and square it, we obtain the HHI measure. The HHI by construction ranges between 1/​n and 1. In order to assess the values, we need to introduce critical thresholds with which we can assess whether or not we have low or high concentration in the industry. The US Department of Justice (2018) and the Federal Trade Commission, which oversees market developments in terms of mergers and acquisitions, typically view an industry with a HHI of higher than 25 per cent as “highly concentrated”, while a share of 15–20 per cent is viewed as “moderate concentration”. Anything below 15 per cent indicates a competitive industry, with values closer to 0 per cent indicating even greater competition in the industry. A simple example helps to illustrate how this works in practice. Assume there are four firms in the film industry, each with a market share of 25 per cent. Thus, we obtain the following:  0.252 + 0.252 + 0.252 + 0.252 = 0.25 . But what does an HHI of 0.25 mean? It means that we are dealing with a highly concentrated market in which each of the four firms has considerable market power. When we look at concentration in the key cultural industries, Figure 7.1 gives us the market share of the four (and eight, respectively) largest firms in the market. We can see that, for all cultural sectors, the top four producers hold at least 40 per cent of the total market share, meaning that they are highly concentrated. Cable television suppliers and music producers have market shares of more than 50 per cent. When we look at the eight largest producers we see that they hold up to 80 per cent of the market, meaning that there are few players that dominate the market with a few smaller players at the fringe. This also implies that these key firms in the market have greater control over product prices, the quantities offered and organizational issues, such as the bundling of products, the timing of market activities and so on. Thus, the HHI offers us a simple tool for assessing how the industry is organized and its implications for market outcomes and welfare. Fringe firms typically are price takers in the market and follow the dominant firms in their pricing and other strategies. In the realm of culture, the fringe may be constituted of non-​profit organizations such as theatre

89

Cultural Economics

Figure 7.1  Concentration is high in cultural industries: concentration of US cultural industries, 2012 Source: US Census Bureau.

companies, heritage foundations or small museums, which make a great contribution to the sector. As a result of their organizations’ non-​market orientation, these organizations can follow very different agendas, and thus their products and market strategies may be different from or even complementary to the main players in the market. When we apply this simple tool to the music industry, for example, we have several arenas in which competition authorities, such as the European Commission in the European Union or the Federal Trade Commission in the United States, have become alert on account of the high concentration of the market. One such market is online streaming of music, for which YouTube is a de facto monopolist operating at the margin of copyright. In other words, despite the fact that no royalties or proceeds are paid to artists, music is made available on YouTube’s website. Moreover, the fact that YouTube is owned by Google fortifies its strong market position, and possibly constitutes a cause for concern for the authorities. When we turn to the movie industry, there also has been concern over the lack of competition and possible collusive behaviour of the large movie producers. After all, one of the main risks of highly concentrated industries, 90

The organization of cultural industries

after high prices, is the relatively high incentive to collude and coordinate illegally in the market in terms of market strategies. A paper by Gutiérrez-​ Navratil et  al. (2017), for example, suggests that major movie producers were indeed coordinating their release dates, for which they were fined by the Spanish Competition Court. Coordinating release dates is one of the main tools by which the movie industry maintains box-​office revenue. Indeed, illegally coordinating release dates might be a win-​win for companies, although such coordination is harder to arrange when there are more firms in the market. Thus, concentration measures such as HHI are used to assess the need for closer investigation of a certain industry by competition authorities. The cost of production Now that we know how the cultural industry is organized at the macro level, we need to add one more piece of the puzzle in order to obtain the full picture. To this end, we have to go back to the essence of cultural goods and services and how they are produced. We defined them as experience and information goods in Chapter 2, and briefly touched upon the fact that copyrights are an important element in ensuring that the original producers earn the income stream associated with their artistic creations, and the various forms of products generated from them, in Chapter 3. The last concept that we need to address is the production cost of creative products. The costs of producing cultural products such as plays, music records or movies entail fixed costs, which are paid before we can produce the first unit of the good or service, and the costs for each individual item produced. These are called the marginal costs. Figure 7.2 illustrates the two types of costs in cultural production. If we think of producing a song, a play or a book, there will typically be the initial development and set-​up costs (for a song, the recording time in the studio, hire of equipment and the recording processes). This creation of a unique new cultural product is generally very costly and time-​consuming. That is why the curved line starts at a very high point in Figure 7.2 for the very first unit. Once you have a new idea and concept –​say the character and plot of Harry Potter and the Philosopher’s Stone, or the idea to turn A Song of Ice and Fire into a television series and filming the pilot –​the costliest 91

Cultural Economics

Figure 7.2  Fixed and marginal costs

part of the process is done and the average cost curve decreases with every unit produced. After that each following unit can be produced at relatively low costs. The costs of the upfront investment into a new product or service are called sunk costs (the highest point of the average cost curve, right where it hits the Y axis), as these costs are incurred regardless of whether the product becomes a hit and goes into mass production. The costs per unit, the marginal costs, are the costs of each additional unit produced –​the costs of each additional printed copy of a book, for example. As we can see in Figure 7.2, these are typically a horizontal line, as each additional Harry Potter book can be produced for a very low price. Reflecting these cost structures, investments in cultural goods and services are typically risky, as the chances of success are unknown and highly speculative and the development costs are, initially, relatively high. Of course, it is very important who carries the costs for the first unit, the master copy of a new cultural product. For established artists, this is typically the firm, and, for newcomers, it is typically they who bear the risks themselves. But it is these high sunk costs in the industry that partly explain why we have such a high concentration in the market. There are only a few music and film companies and book publishers that have a global distribution 92

The organization of cultural industries

network and the facilities to produce hit shows and songs. Thus, the equivalent of the individual superstar is indeed the top firm, which provides the link between artists and the market. They steer the market and set industry standards. Of course, with changing technologies and new players entering the market, the industry dynamic also changes. Yet the good, swift and agile key players, which are established and able to adapt and innovate, continue to play an important role in the market. Structure conduct performance Lastly, we need to understand how the various layers of industrial organization go together in order to understand how the market structure and firms’ realities and strategies are linked. This dynamic is called the structure–​ conduct–​performance (SCP) paradigm, and it is illustrated in Figure 7.3. This link between the various layers of the model is, obviously, neither as direct nor as static as the model suggests. Causality cannot be assumed but, rather, needs to be empirically tested. However, it is a helpful tool for understanding how cultural industries work.

Figure 7.3  The structure–​conduct–​performance paradigm 93

Cultural Economics

In the first instance, we want to understand the industry structure; this is largely covered in Chapter  2. How many producers are there in the market? What kind of products and services are being produced, and are products and services differentiated? What is the going price in the market? How many units are produced? Similarly, we have to consider the costs of producing the cultural good or service in question: are there big upfront investments, such as for a movie or a record production? Moreover, demand characteristics, such as consumers’ elasticities (discussed in Chapter 4), tastes and preferences and readiness to substitute, are all important determinants of industry structure. Second, I analyse how the industry structure impacts on the individual companies’ conduct in the market –​that is, how do firms set their prices, how do they place their products, how do they advertise them? How much research and development is necessary in order to stay on top of market developments or to influence the market with a new strategy or technology? These are typically strategic decisions at the firm’s executive level. And these decisions are made in light of the market structure the company is operating in and what that implies for their market power and discretion over various strategic elements. Third, performance depends on both these previous layers and reflects how successful and efficient an individual company is. Typical measures used to evaluate a firm’s performance would be its profits, its return on investment (as reflected in its stock market price) or its role as an innovative leader in terms of technology in the market. How successful a company will be is determined both by previous layers of the model, namely the company’s strategy as well as the industry’s structure. Of course, there are various cases when, because of technological changes, such as digitization and social media, or legal changes, the dynamic in the industry alters as new firms enter the market: some fail, and existing firms gain and lose in market share. The art of the deal: principal–​agent relationships When combining the idea of the firm in an industry and the artist who is the original creator of the cultural product or service, it is fair to say that talent is only one ingredient for success in the cultural world. As we have 94

The organization of cultural industries

seen in Chapter 2, much also depends on the market that these artists are associated with. And in that market there are various agents who broker talented artists into the market and help them to become famous. They might be literary agents, talent scouts at one or other music company or curators in galleries and museums. They usually are the gatekeepers to success in the established platforms. These relationships can be characterized by a principal–​agent framework, in which the artist is the principal, who looks for an agent to represent him or her and act in his or her best interests in the market. The basic relationship between principal and agent is depicted in Figure 7.4. There are several properties of the above dynamic. One is that the agent –​ in our case, the music label or film producer –​does not know the talent nor the success rate and profit potential of any particular project upfront. Thus, the firm as an agent takes a risk on behalf of the principal, the artist. Both these parties have conflicting interests that need to be mitigated, and they are often pooled at the firm (or organizational) level. This fact is often reflected in the various types of contracts that are offered in the music industry to the top stars, and, similarly, by the large salaries actors receive.

Figure 7.4  Principal–​agent  theory 95

Cultural Economics

Again, the way these principal–​agent relations work in practice largely depends on the involved parties’ bargaining power. Superstars typically get better terms and conditions than rookies; rising stars might be tied up in contracts that do not reflect their full earnings potential yet; and stars past their prime may be relatively low in their risk yet they typically will not be the top earners. Case study: who needs an agent? Two examples of principal–​agent relationships over time As we can see, the role of firms and cultural organizations, such as museums, is largely as gatekeepers to the market. They are an important bottleneck for creatives. After all, editors, agents and curators decide which artist gets wall space, airtime or a book contract. Although these dynamics are not unique to the cultural realm, they still shape a lot of what we consume and hold in high esteem when it comes to culture. Two cases demonstrate how market representation has worked and how market entry mechanisms have changed over time: Leo Castelli and Motown. Leo Castelli was one of the most important art dealers in the United States in the 1950s and 1960s, and he was partly responsible for the fame of many contemporary American artists, such as Robert Rauschenberg, Andy Warhol and Frank Stella. Although abstract expressionism and pop art helped American modern art shoot to fame, Hulst (2007) attributes the success of these American artists also to the business strategy of Castelli, who held landmark shows that he advertised and curated carefully. Although there were a host of collectors in the United States, they were more inclined in buying European modern art than the American avant-​garde. However, Castelli changed that inclination with his savvy marketing strategies, and by connecting collectors and artists in a way that created value for both sides, as artists became ever more famous and their paintings more valuable. He mostly did this by giving the collectors a platform to showcase their activities, which helped Castelli’s reputation as a gallerist as well as the artists he was representing. Moreover, he paid the artists a stipend, which gave him exclusive access to their works while expanding their reputation with strategic exhibitions in the United States and Europe, thus 96

The organization of cultural industries

benefiting from the artists’ increasing fame by means of their paintings. Thus, Castelli’s gallery model of representing a small and exclusive set of artists, whose work he pushed into the market and propelled to fame across the Western world, has had a lasting impact on how we view this generation of artists and where their paintings are on display today. Castelli perfectly illustrates how principal–​agent dynamics and incentives work in the art world. Another artist, Kaws, became famous via Instagram in the 2000s. At time of writing, Kaws and his cartoon-​like characters have 2.9 million Instagram followers, and he is currently considered to be one of the most important living artists (Harmon 2019). This is also reflected in the many solo shows he has staged across the globe, and an auction record for one of his works, which sold for US$14.8 million. Interestingly, Kaws came to fame mostly via social media. His huge following gave him a place in popular culture and a successful commercial brand for advertisements and design. As pop stars started to collect his pieces, he was accepted into the traditional art world, namely into museums and auction houses. Although there are some who look down on his art as “pop culture”, his route to fame is one of those examples when the traditional principal–​agent relations are bypassed thanks to digitization. Nonetheless, the path to success in Kaws’ case ultimately led to the traditional market mechanisms and channels of expert assessment. However, it seems that, with changing technologies, there is more diversity in the gateways to fame, as well as the opportunity to challenge the accepted sequence of events along the way –​that is, becoming successful in social media before succeeding in the more traditional art market. Motown was one of the most influential labels (or “agent”, in economic theory terms) for black music in the 1960s and 1970s. The record label made Detroit famous for music as well as helping black music enter commercial markets and become acknowledged. With the first wave of success in the late 1960s came a string of enduringly famous artists and a particular “Motown sound”, which made the label one of the most important gatekeepers to the music market at the time. Diana Ross and the Supremes, Marvin Gaye, Stevie Wonder, the Jackson Five –​to name a few –​were all signed to the label. Their comparative advantage was that they almost monopolized the early days of soul and R&B. This strategy made them extremely successful in the market, with many superstars producing a host of top ten hits for them. Similarly to Castelli, 97

Cultural Economics

Motown’s strategy was to find young, talented black artists and help them develop and promote their careers until they were famous, concurrently making its label a household name in the process and a byword for a certain kind of popular music. In comparison, we have the British band Arctic Monkeys, which came to fame through its performances and own-​label releases, which were shared on myspace.com in 2002. Through the band members’ strong following on social media and small, local gigs, they soon garnered media interest. They were signed by the small Domino label in 2005, and rights to their music were sold on to EMI until they made it to world fame. Although the band is now in a standard principal–​agent relationship with a record label, it bypassed the typical selection process of labels in the early days of the singers’ careers. This is also reflected in the fact that the band still releases its singles on its YouTube channel. Another interesting case in point is the country singer Lil Nas X and his self-​released 2018 single “Old Town Road”. The singer promoted his rap/​ country mix via various social media and memes featuring the song. After the song went viral on TikTok in early 2019 it made it into the Billboard “Top 100”. Although the song also appeared in the Billboard “Hot Country Songs” chart it was later removed for not being “country” enough. After several established country stars remixed the song it made it to number 1 in the Billboard charts. Lil Nas X eventually signed with Columbia Records. There are, then, several channels into the market that can broker the way to success. How these processes have evolved over time and how traditional principal–​agent relationships and their channels coexist with social media activities are as important as market share in terms of record sales and concert tickets. Summary • Cultural industries are highly concentrated, with a few key players dominating the market. • The Herfindahl–​Hirschman Index concentration measure can be used to assess the degree of competition. • Sunk costs are typically high for cultural products and services, while marginal costs are low. 98

The organization of cultural industries

• Sunk costs act as a barrier for market entry if they are prohibitively  high. • Industry structure and firms’ conduct and performance are linked in the SCP paradigm, which helps us understand how these layers of cultural industries are interconnected. • Principal–​agent dynamics determine the conduct of firms with the artists they represent. A lot of the dynamic depends on the parties’ market power and where artists are in their careers. • With the rise of digitization new channels into the market open up, and competition changes and encompasses new platforms.

99

8

The internet’s impact on cultural sectors

Digitization has changed the way we work, conduct our business, trade, communicate, advertise, listen, watch, shop, plan our vacations and so on. When it comes to culture, the key change can be summarized as a massive shift in ownership structures. Such changes can be found on both the supply and demand side: proud owners of record collections have become smartphone owners and Spotify clients; shelves of books have turned into files on an electronic reading device; and a back catalogue of movies and television series can now be streamed on the internet and stored on the cloud, earning their licence holders money as and when a file is downloaded. Through all these many spheres, the internet has had a massive impact on the ways that a lot of culture is produced and sold across the globe, and also on the way we consume it. Production processes on the supply side and the technological know-​how necessary in the industry as well as for the consumer have both changed tremendously over time. The music industry was hit first, and in many ways the hardest, simply because its content was the easiest to digitize and files could be readily shared on the web. Two main forces impacted the music industry at the same time. First, technological progress gave rise to piracy, with the arrival of peer-​to-​ peer (P2P) platforms such as Napster and Piratebay promoting free and illegal access to music across the globe. Meanwhile, the music industry was still grappling with new technologies and developing new business models with which to transition into the digital era. Second, the decreased costs in production and publishing arising from digitization made production much cheaper, lowering the barriers to entry into the market and therefore increasing production. Moreover, digitization also impacted ownership structures, which in turn changed the consumption patterns and their complementarities on

101

Cultural Economics

the demand side, as well as opening new avenues for artists to make it in the market and to earn money. An example of such a “complementarity” is the extensive live tours that many artists now undertake to generate additional income. The internet has also enabled greater access, both legal and illegal, so that you can avail yourself of content free of charge in many cases, if you have no qualms about the illegality of piracy. Consequently, this has disrupted some of the former earnings channels for artists. Another part of this evolution is the merger across formerly separate strands of industries, as software and apps have become ever more important in terms of integrating businesses. Hardware changes in the market, such as the arrival of smartphones, become a push factor for music and film producers to develop new business models in order to partake in this new market. Ultimately, many of these developments have had three main effects:  (a) better market reach and easier access to culture, with shorter channels between consumers and markets; (b)  increasing legal and technological demands on producers as well as customers; and (c) short principal–​agent dynamics, with many shifts in bargaining power –​that is, shifting leverage in negotiating contracts between artists and their representatives or producers and distributors. Music industry: from goods to services This sector has been one of the few that has experienced a massive transformation because of new digital technologies. Of course, many industries have changed the way they carry out their business, how they communicate and organize themselves. But, for the audio-​visual sector, the very essence of production changed from making a physical good to producing an intangible service. In other words, record companies went from pressing CDs or vinyls to running servers on which to place their music and selling licences and rights to access their artists’ works. This was a fundamental overhaul of a big industry, which saw integration with the IT sector in ways that had largely been unheard of beforehand. This period of change was accompanied by a long stretch of uncertainty and reinvention before a new business model was arrived at. Although many record companies made most of their money from selling physical goods and relatively few tours before digitization, now the profits earned 102

The internet’s impact on cultural sectors

from music sales are relatively low, whereas live shows and other forms of secondary income, such as advertisements, have become much more important. This trend is shown in Figure 8.1. Virtually all categories of music sales have experienced declining growth rates in the last ten years, with many of these sales now shrinking year on year. Interestingly, this is not the case just for physical record sales but also for digital sales. It is worth noting that sales of vinyl records have experienced unstable yet surprisingly large growth rates, which might be indicative of the oft-​mentioned retro waves, with consumers looking for haptic versions and collectible versions of their digital music libraries. Bartmanski and Woodward (2018) use a sociological approach to try to explain this phenomenon: vinyls are objects with an aura, a different sound quality and an iconic image, thus lending themselves well to being seen as symbols of distinction. However, it is not entirely clear why this argument does not apply to discs or cassette tapes. This might be further

Figure 8.1  Changing music formats: annual change in US music sales by category, 2010–​2018 Source: Statista, taken from Nielsen (2019). 103

Cultural Economics

underpinned by the fact that, for many a collector, the record’s artwork is also critical, as they are so elaborate and often iconic for the time, such as the Beatles crossing Abbey Road or Nirvana’s swimming baby on Nevermind. Moreover, the surface of a vinyl is large enough to make room for an artwork, unlike with CDs or even tapes. Nonetheless, given the market trends, if we believe that people still care about music as much as they have ever done, this trend means either that they are not purchasing their music at all but, rather, choosing to stream it or that they obtain it illegally. Both these options are something that the music industry is grappling with in order to stay profitable. When it comes to streaming, Figure  8.2 offers some insights. It is important to note that the incomes from streaming services are accounted for differently from the sales presented in Figure  8.1, as they are sold as licences to use, for which the streaming services such as Pandora or Spotify pay royalties. These royalties now make up the lion’s share of the music industries’ profits, amounting to almost 80 per cent in 2018. This is reflective of the large shift in the business model, whereby music producers are largely focused on producing records whereas sales and distribution are for the most part with the big players in the digital market.

Figure 8.2  An uphill stream: the share of streaming in total US music revenues, 2009–​2018 Source: Statista, taken from the RIAA.

104

The internet’s impact on cultural sectors

If we want to look back in time and consider the transition phase for many music companies, we need to take into consideration the fact that profits were falling around the late 1990s and early 2000s after digitization made it possible to pirate and listen to music online for free. Streaming services had yet to develop, making it extremely difficult for firms to protect their cultural property in terms of copyright and to be able to earn money from it. At the same time, the music industry had not been ready in terms of technology and business models to develop and offer paid alternatives to consumers. Then again, how large this effect actually was and by how much profits actually deteriorated are the subject of debate in the economic literature. McKenzie (2009) finds that, for the Australian music market, there was no significant decrease in legitimate sales due to piracy on P2P networks (file sharing) when controlling for song heterogeneity. When it comes to the impact on quality in the music industry, and a possible deterioration because of cheaper production capacities and artists being able to enter the market without agents, management or labels, Waldfogel (2012a, 2012b) presents some interesting findings. He simulated the “Napster shock” to the music industry in order to investigate empirically whether decreased production costs actually led to worse quality in the music industry. Interestingly, he does not find that that is the case. In fact, when looking at the critical acclaim of music over time, music quality was deteriorating before the introduction of Napster in 1999 and stays at constant levels after that. This is indicative of the fact that the shock to the supply side, and therefore lower production costs, did not impact quality as a result of increased competition and easier access to the market. This transition arising from technological progress and the adjustment phase that came with it, both in terms of industry structure and firms’ conduct and business models, went hand in hand with many institutional and legal changes concerning the internet and fair usage of cultural material online. The mere fact that we went from large piracy discussions in the early 2000s to debates about fair payment of artists by streaming services offering relatively cheap access to a whole catalogue of music gives testament to the pace at which the market evolves.

105

Cultural Economics

Music industry II: live show complementarities It is important to realize that this shift in market power is attributable solely to technological change at which firms other than the original record producers had a competitive advantage, and therefore were able to enter the market for music distribution, thus reducing the market share of record labels in that market significantly. In short, the principal–​agent dynamic described in the previous chapter changed because of technological progress, resulting in new market dynamics. Thus, many artists increased their live performances as an alternative source of revenue, and one in which they have more control over prices. This came at a time when profits had experienced a marked decline, thereby eroding profits from physical record sales. Streaming could only partially replace the falling income from music sales because of lower price levels and a loss of market power for artists and labels alike. Prices and income potential for artists have become a hot topic, with prices as low as US$0.06 for streaming a song via Spotify. And this sum typically has to be shared between record labels, producers, artists and songwriters. In such a highly competitive winner-​takes-​all market, other sources of revenue over which record labels had more discretion and that were lucrative obtained more weight in their portfolios. And live concerts, especially in pop music, have experienced a surge, with ever more and ever longer tours as well as increasing ticket prices, especially in secondary markets. An example of this trend, according to Statista, is the revenues of Live Nations Entertainment (one of the largest live tour promoters, and the company resulting from the 2010 merger of Ticketmaster and Live Nation) tripled between 2006 and 2018, from US$3.2 billion to US$10.79 billion. Moreover, growth in revenues from performance rights has increased in the last few years, albeit their absolute share in revenues is still relatively small. This is indicative of the fact that artists now tap further into the complementarities of music consumption and live shows for consumers by offering more of the latter. Broadcasting: the death of television The internet was a major disruptor for the entire industry structure in the broadcasting business, opening it up to new players in the market, which 106

The internet’s impact on cultural sectors

have risen to the top in no time. Before the 2000s broadcasting was largely split between television –​public and cable –​and the movie industry –​major and smaller studios. Thanks to digitization and, therefore, industry restructuring, we have seen the emergence of a much more fluid industry and many new players, as a result of new technologies such as streaming as well as new consumption patterns. In a similar way to the music industry, new technologies have changed the “When?”, “What?”, “Who?” and “Where?” of broadcasting. Consumption patterns have experienced four major changes. • “When?”: viewers decide when to watch (with some notable exceptions, such as major sports events) with the advent of on-​demand television. • “What?”: consumers can now watch (almost) everything from films to television series, to the news, choosing from vast libraries of content. • “Who?”: new streaming services available through new hardware or smart TVs enables platforms such as YouTube and TikTok to act as the vehicle for viewing content. • “Where?”:  internet streaming services have freed viewers from the living room, enabling them to watch on any device –​mobile phone, tablet or personal computer. In terms of our economic toolset, these changes have meant a shift of power from producers to consumers, which goes hand in hand with lower prices and a higher variety of products on the market. If you compare pay-​ per-​view prices on Amazon Prime, for example, with the price of a DVD or a movie ticket and the many relatively low-​price streaming platforms, you can see how consumers benefit from digitization in this market. Moreover, the internet is an important factor in mitigating information asymmetries. As a movie or a box set of a show is a relatively costly time investment, viewers would like to assess the utility they might obtain from watching that show before actually watching it and making the investment in time and money. With the many trailers on YouTube, consumers can now obtain a much better idea of what to expect than they could in analogue times. In other words, digitization has rendered the word-​of-​mouth effect much more dominant, as viewers can now deduce from “Likes” and reviews how well received a particular film or show is. Of course, this is in addition to any social influence obtained from peers. 107

Cultural Economics

When we turn to the producers’ side, the market has been shaken up by the many new players entering the market because of their comparative advantage in technology rather than their expertise in the core of the business, which is movie/​show making. As such, the initial impact –​as for music platforms  –​came through distribution rather than production. In other words, films and shows could be made available in many new ways, increasing competition in distribution, decreasing prices and decreasing profitability. Profitability mainly went down because, at the same time as revenues from selling licences to play content fell, production costs remained relatively stable. However, in the second phase of the digital era in visual products and services the market consolidated much more, with new platforms such as Netflix and Amazon Prime beginning to dominate and to engage in the production of materials as well. In their early days their key business model relied on obtaining material from various suppliers and making it available through subscription services. Thereby, they increased the market reach for many older films and shows such as NBC’s Friends as well as giving a platform to smaller productions such as La Casa de Papel, which was originally broadcasted by and for Spanish television by Antena 3. The larger and more popular streaming services became the more they could expand their selection of titles, and thereby broaden their offered content. Such economies of scale –​the more a firm produces/​offers the cheaper it becomes –​largely explain why they have such a dominant position in the market now. Were there many smaller players splitting the market, it would become less profitable for each of them to offer video-​on-​demand services, as their scale would be smaller. However, the downside of economies of scale is that, once firms are large, they wield a lot of market power and therefore discretion over prices for consumers, as well as bargaining power when it comes to licensing agreements. This becomes a concern should suppliers increase prices for viewers considerably, as they can rely on the fact that customers are in a bind due to a lack of competitors. The same applies for licence agreements with content producers, who might have very little to bargain with for the reach that these platforms offer. The impact on the traditional broadcasting companies grew when new market participants also began producing content. According to Bloomberg (Shaw & Ross 2016), Netflix spent US$5 billion on producing original content in 2016, which may be read as an increase in the firm’s reach into 108

The internet’s impact on cultural sectors

the market share of cable television beyond mere distribution. Similarly, Amazon founded its own studios in 2010 in its transition from online store to distributor of cultural services to producer of content. In many ways the vertical integration of these activities seems obvious, as it allows companies to grow and increase profits while at the same time relying on their previously gained expertise and market knowledge. Netflix and Amazon utilize their own usage data to obtain detailed knowledge of their consumers’ preferences (how many tune in, when they stop viewing a programme, how long they spend searching and what they like to watch often). This enables them to produce and market shows tailored to their viewers’ taste matrix. It is no surprise that they have produced shows that compete with established cable producers for viewers’ attention and time investment, such as Amazon’s The Marvelous Mrs. Maisel or, indeed, the sequels to La Casa de Papel, which Netflix self-​produced, or the Italian mafia drama Suburra. Perhaps most outstanding in terms of critical acclaim is Netflix’s 2018 film Roma, which won three Oscars. When taken together, these two market phases by new competitors  –​ ­distribution and production  –​have exerted significant pressure on traditional television. Moreover, the mere digitization of their content by means of online media platforms seems to be falling short of the innovativeness of many of the new market players. Figure  8.3 illustrates the shift in the industry. When looking at Panel (a), we see that there is an increase in the market overall (people watch more in total). Second, the increased role of private competitors to broadcast television networks with cable and on-​ demand streaming means there is modest growth for television networks whereas cable and streaming networks are growing considerably. When looking at Netflix in particular (Figure 8.3(b)), we see that the company’s market share has expanded considerably, with subscribers increasing their average streaming hours from ten minutes to two hours and ten minutes between 2009 and 2015. In sum, television has experienced a large decrease in its importance in the provision of visual content –​that is, there is higher competition for viewership and quality demands increase. Especially in terms of quality, we see that the winner-​takes-​all phenomenon becomes more apparent in a dynamic market. In other words, in order to be profitable, television and streaming services alike need to produce well-​received hits that become a sure source of revenue to them. 109

Cultural Economics

Figure 8.3  Shifts in screen time: (a) Number of US original series*, 2009–​2016; (b) Netflix worldwide, 2009–​2015 Notes: Panel (a): * = excludes daytime dramas, non-​English-​language material and children’s programmes; ** = end-​July. Sources: The Economist, FX Networks Research, UBS, company reports, Bloomberg.

110

The internet’s impact on cultural sectors

The book market: e-​reader versus “real” books We can observe a similar development in the book market, with digitization changing the market considerably and leading to a wider variety in the products on offer. Before we look at the impact of digitization it is important to understand that the market for books is highly regulated in some parts of the world, most particularly in Europe, where booksellers operate under a fixed book price regime. Publishers and/​or retailers are allowed to sell books only at a certain, fixed price or within a certain margin of a pre-​set price. This policy effectively curbs price competition, and publishers as well as authors compete on quantity. Thus, effectively, best-​selling books cross-​subsidize books that are bought less often. In other words, best-​sellers support niche products financially by sharing the surplus of revenues across all published books in the publishing house. However, nations with large numbers of readers, such as the United Kingdom, have free, uncontrolled (by the government) prices in the book market (Fishwick 2008). In many ways, digitization has changed publishing houses, book retailers and product variety. Now it is possible to obtain a book as a print version, digitally as an e-​book or as an audiobook or various combinations thereof. These markets are novel, in the sense that technological advancement has made it possible to provide books through new channels. And, similarly, in the audio-​visual sector, new players that were closer to the technological frontier were able to employ technology in the book industry more rapidly than traditional incumbents. When we look at the US book market over the last ten years, for example, as depicted in Figure 8.4, we see that reading in total is in slight decline, which is largely attributable to the decline in sales of print books. However, new book formats have experienced modest growth at the same time, e-​books and audiobooks increasing their market share from 11 and 17 per cent, respectively, to 18 and 26 per cent, with the effect levelling off over time as markets saturate and these formerly innovative products reach maturity. In sum, it seems reasonable to assume that, although the preferences for reading and the time constraints of consumers are fairly stable over time, consumers substitute away to new formats of book consumption. This dynamic has changed the industry structure markedly, which, in turn, has led the players in the market to make adaptations in their business conduct as well as in their business model and wider ecosystem. 111

Cultural Economics

Figure 8.4  US book consumption, 2011–​2018 Source: Statista.

Again, it is through distribution of content that has seen the largest shift. With Amazon offering the most widespread e-​book reading, its market share –​as well as its power –​is large. Nonetheless, publishers are still the gatekeepers to the market, and they select the content to be published and the channels through which it can be released, as they hold the publishing rights to the material. This industry shift is in many ways comparable to the music industry with its streaming platforms, which put pressure on prices and proceeds to publishing houses as well as on royalties and advances to authors. At the same time, we can assume that the costs of production for book writing are largely unchanged, and that publishing houses face efficiency challenges because of the digitization of production and, simultaneously, reduced market power in distributional channels because of competition. These reduced barriers to entry in the book market are also apparent in the many small publishing houses –​or, indeed, self-​published e-​books and audiobooks –​that can be found online. Another important aspect is that the market for children’s books is largely unchanged by the arrival of e-​books, as children need the haptics of physical books and might not be ready to handle breakable devices. Moreover,

112

The internet’s impact on cultural sectors

schools require physical copies of books for mandatory reading material, which makes this market segment different on account of this steady demand for classics. Whether or not children learn reading more effectively with physical books or e-​books, and whether electronic devices can serve as supplements (for vocabulary, for example) or as complete substitutes for print books, are not entirely clear yet in current research. In addition, this market segment is in many ways still protected by the fact that the technology is in the process of development, as image processing and screen technology are not at the stage at which an ­ e-​book reader could process picture books at a reasonable cost. Thus, there is a technological barrier as well as a consumer taste constraint in this ­particular market segment. Principal–​agent dynamic gone digital in the book market The gatekeeping roles and access to the market for artists have changed considerably thanks to digitization. We have seen that many musicians now become famous and ultimately sign with one of the major music labels after “making it” on social media. Interestingly, we also see such a shift in market exposure and subsequent bargaining power with traditional gatekeepers in the book market. This is a result of the fact that the number of books available on the market has doubled since self-​publishing platforms became available. Of course, only a few authors have become successful after self-​ publishing their works, but, with such a huge number of self-​publishing authors, we might expect there to be an impact on the market, as well as the author–​publisher relationship. This phenomenon is studied by Peukert and Reimers (2019), who analysed data of authors who had self-​published between 2002 and 2015 and looked at how they fared in negotiating licence deals with publishers. Their idea was that authors who have self-​published and been successful in the market might have a better bargaining position and therefore be able to negotiate better deals with publishers. Before digitization and the option to self-​publish it would not have been as easy to bypass intermediaries in the book market in order to obtain a signal of quality, on the basis of which authors could improve their negotiation position.

113

Cultural Economics

And, indeed, Peukert and Reimers find evidence that authors who have self-​published do get better deals for their books. Moreover, they find that the positive market signal that the author has generated by means of self-​ publishing helps publishers to mitigate the uncertainty in the market. Ex-​ post demand after the book deal has been struck can indeed be predicted more accurately with an earlier market signal. In other words, it is easier to cater to the market and to plan production processes as a result of these new opportunities brought about by digitization. As such, digitization is beneficial for the publishing process and for reducing risks, not to mention search costs, for talented authors. Therefore, self-​ publishing is a relatively costless way to assess the quality of a product –​and, indeed, market appeal and success  –​before investing in a comparatively costly production process. This is possible only because digitization allows us to discern two distinct production processes: the first master copy and subsequent products. For the former, the risk, cost and time investment lies purely with the author, while the actual monetary costs are relatively low. For the latter, subsequent production remains with the publishing house, but it enters into the contract with much better information about the product, as well as about the author and the potential for success in the market. This effect is what Peukert and Reimers call “digital disintermediation”, which, in turn, leads to more efficient book markets. Libraries: chambers of culture? In addition to the many market aspects discussed above, it is also important to realize that books have a public good aspect to them, in that most societies believe that the reading of books and the culture contained within their pages create value beyond the price paid for an individual copy. This feature of books is most easily exemplified in public libraries, which contain a treasure trove of our heritage, as well as our knowledge, in both analogue and digital formats. Obviously, providing access to books is one of the key arguments for spending money on libraries, for their educational purposes, their social function in many neighbourhoods and acting as an archive of culture. Books serve many functions next to their private consumption properties: we read them for pleasure, for study and for information, and we rely on them for providing glimpses into the past. There are probably many reasons 114

The internet’s impact on cultural sectors

why reading is such an important part of our culture, which is upheld and celebrated in many ways. And, indeed, one of the cornerstones of reading culture is the large number of libraries there are global, which host our historic and cultural treasure troves, in the case of the top libraries of the world, or simply offer access to a range of books, in the case of the many local libraries. And, of course, no college would be the same without its library, serving to inform its students and researchers alike. Digitization has impacted such public provision of books. Most libraries have digitized their catalogues; however, the digitization efforts in terms of the actual works are largely bound by copyright laws across the world, as much as digitization means democratization and free access to cultural material. After all, in a digital age it would be very desirable to have a digital repository of knowledge. Two major efforts have been undertaken to make historical material available online. The first is Project Gutenberg, which is a public digital library of copyright-​free books that are digitized and made available by volunteers. The second, and somewhat larger, effort was undertaken by Google in its Google Books project. The aim here was to digitize the book and magazine content of libraries, and, according to Google’s own claims, it had digitized over 40 million titles by 2019. A key question is: are digitization efforts making libraries obsolete? After all, if everything is available online, why would anyone bother obtaining physical titles from the library? Economists call such an effect crowding out –​that is, the digital versions of books crowd out demand for physical versions. In other words, we would see loans in libraries considerably going down, potentially posing a serious challenge to their raison d’être. Nagaraj and Reimers (2019) tackle this very question, using information on the Google Books project digitization efforts in Harvard University’s library. To this end, they analysed loan data and scanning data in order to estimate the possible decrease in demand for library loans from Harvard arising from digitization. They find that the likelihood of a book being checked out once it is available online to users decreased between 3.4 per cent for less popular books to 28 per cent for more popular books. Thus, the results suggest that digitization does indeed harm library lending. Moreover, Nagaraj and Reimers tested whether the digitization of books available in the library by Google impacted book sales. Interestingly, they find that book sales increased by 35 per cent for books that had been 115

Cultural Economics

digitized. This result is mostly explained by less popular works, which perhaps would have not received any attention had it not been through Google’s search function and an online extract of the book. Therefore, Nagaraj and Reimers conclude that digitization does not cannibalize demand but, instead, that it helps promote sales of otherwise undiscovered books. This would suggest that online versions of books provided by Google, or any other platform, are viewed by consumers as complements to buying a book; however, they are indeed seen as substitutes for taking books out of the library. Case study: where do all the streamers go? Silicon Valley and the streaming industry When thinking about the ways that digitization has changed cultural industries, we can use the tool of spatial analysis to illustrate the impact on the industry. In many ways, industrial organization manifests itself in the geography of the industry –​that is, where the key players are located. Hollywood is certainly the hub for movie production, places such as London, Los Angeles and Detroit are homes to music production, and many important publishing houses are located in London and New  York. These industry hubs are referred to as clusters or agglomerations in economics. The reasons we have such industry clusters are manifold. First, there are economies of scale that can be shared across an industry, say by being able to tap into a qualified labour pool or by being able to utilize the same suppliers, who, in turn, can offer cheaper inputs when catering to a larger market. Second, the knowledge and know-​how of an industry is typically where the competitors are. In other words, industry advances such as new technologies, new supply chains or new business models can easily be shared across companies when they are in the same location. And this knowledge and know-​ how can be transferred formally by means of labour, for example, or shared research and development operations, as well as informally by networking and sharing information in conversations. Thus, firms often choose to locate near the industry’s other key players so that their core business can benefit from them. This implies that the risks of such co-​location (my competitor knows my strategy and will try to copy it) are less significant than the benefits; otherwise, we would not see so many industry clusters. 116

The internet’s impact on cultural sectors

Of course, technological changes have a large impact on the type of knowledge needed for a business, and digitization is a good case in point. Music companies, broadcasters and book publishers need to have different sets of technological skills for production, distribution and marketing in the digital era from those they had previously. At the same time, firms still need to know the “tricks of the trade” in order to produce books, movies and so on. In short, when applying this to the real world and looking at the large industries in the United States, the question boils down to: should a firm locate in Hollywood or in Silicon Valley? In order to answer this question and to obtain an idea of how important these two types of knowledge are, Figure 8.5 presents a map that captures the location of the major players in the audio-​visual sector. California is home to three of the key technological companies  –​Google, Apple and Facebook –​all of which are in Silicon Valley (Microsoft and Amazon are exceptions in this respect), while traditional movie and series producers are

Figure 8.5  Cross-​industry spatial concentration in Silicon Valley: company headquarters, 2019 Notes: Own selection of companies; not to scale. 117

Cultural Economics

largely located in Hollywood, with Buena Vista, Warner Brothers, Universal and Columbia/​Sony being the largest players. For new streaming companies that are operating exactly at the threshold of these two industries, and need know-​how from both, their locational decision can reveal which type of knowledge they deem more important for their core business (provided that both locations are otherwise comparable in terms of costs and infrastructure, which we assume they are). What we see is that the two key clusters have become stronger and more pronounced with new digital platforms. Moreover, we see that the majority of streaming service providers are indeed located in Silicon Valley. In other words, the key synergies that firms in the industry are seeking are in the areas of digital and technological expertise, which is why it pays for them to co-​locate to technological companies rather than film producers. This pattern is reflective of the market power of technology, as well as the key players, which impact the market based on their competitive edge in technology. The conclusion is that this massive change to these cultural industries did indeed come from outside the industry and was solely driven by technological advancement. Thus, innovation in the industry largely came through a force external to the key players in the market, which then adapted to this exogenous change. Summary • The audio-​visual sector has seen a shift from product markets to a service industry. • Digitization has increased the market power of consumers and decreased the power of incumbent firms. • Prices have decreased while quantities and product variety have increased as a result of digitization. • Innovation is pushed through technology outside the core industry specialization, which reduces the barriers to entry into the market. • The distribution of cultural products and services has changed through digitization. • New entrants into the audio-​visual sector co-​locate with tech companies to avail themselves of digital knowledge rather than industry-​ specific production know-​how. 118

9

Globalization’s impact on cultural sectors

In this chapter I will analyse the impact of globalization on the dynamics of the audio-​visual sector and art markets as representative of the cultural industries in general. In a way, globalization was the first great transformation of cultural markets in the 1980s, before the onset of digitization in the late twentieth century, and it has notably affected cultural industries in terms of both supply and demand. Taken together, these two forces –​globalization and digitization –​have had such a lasting impact on economic and cultural activities because the two cross-​fertilized each other, with digitization fuelling globalization. After all, the transmission of cultural goods and services, particularly the latter, was largely made possible through digital technology, as well as worldwide availability and access to information. When we think of globalization, there are two aspects that come together in terms of the cultural industries. First, markets become more global and integrated, thus opening up opportunities for earning money with cultural products in an ever-​expanding market. Second, cultural globalization might entail some convergence of tastes and preferences. What is economic globalization? Starting with the economics side of it, globalization is largely measured and understood as an increase of trade across the world. This entails high growth in traded goods and services as well as the mobility of capital and labour between countries. One of the key driving forces behind globalization is trade agreements, which have removed the many duties, taxes and tariffs that had previously been barriers to trade.

119

Cultural Economics

The European Union started from this very idea of economic integration, in its early days as the European Coal and Steel Community. In the late 1980s and early 1990s major trade deals were largely negotiated and facilitated by the World Trade Organization (WTO), which succeeded the General Agreement on Tariffs and Trade (GATT) in 1995. These supra-​ national institutions provided the means to settle legal conflicts on trade between countries. In the later phase of globalization, many other smaller, regional trade agreements followed. From a purely economic perspective, trade is beneficial for a country if it has a comparative advantage, in that it can produce a good or service at a lower opportunity cost than another country –​that is to say, it has to give up less in terms of production than other countries to produce the good or service in question. Thus, there are gains from trading, as resources are used more efficiently across the globe. Of course, the reallocation of production also means that profits and welfare are distributed differently. As a result, markets became more integrated and more countries enjoy economic prosperity; economic disparity across the globe decreases. Many developing and poor countries gained traction in global markets and became wealthier emerging economies. Some of the great winners from globalization have been Asian countries, namely the “Asian Tiger” states of Hong Kong, Singapore, Taiwan and South Korea, as well as Ireland (the “Celtic Tiger”) and the BRIC countries (Brazil, Russia, India and China). Globalization and culture When we look at the second aspect of globalization, namely that culture itself becomes globalized, we need to identify the two market sides again –​ consumers and suppliers –​in order to understand how globalization has affected and still affects cultural industries. First, cultural entrepreneurs have greater market opportunities by being able to sell their products to a wider audience, and thereby increase their profits. Asia has become an increasingly important market for art fairs as well as movie producers and musicians, with China being the key market thanks to its size and economic importance. Not only do firms seek to export their existing products into these markets but they also change them to cater to the preferences of their expanded customer base and make the products 120

Globalization’s impact on cultural sectors

more relatable to the new audience. One example of this is that, in recent years, we have seen an increase in Chinese elements in major blockbuster movies, such as Mission Impossible 3 being partially filmed in Shanghai or Dreamworks’ Kung Fu Panda  –​a Chinese-​themed cartoon. Hermosilla et al. (2018) also find statistical evidence that suggests casting decisions in Hollywood productions have been influenced by a desire to appeal more to the perceived preferences of Chinese audiences. At the same time, countries outside the industrial core of Western cultural production also have an easier time accessing the global market and selling their films and music. In other words, next to the large key players in the industry, particularly the United States, new players emerge and competition changes, particularly at the fringe, thereby giving customers a wider range of choices. This is one of the key advantages of globalization and international trade: product variety increases while there is also downward pressure on prices owing to greater supply. When considering the firm side of cultural production in a globalized world, we also need to consider changes in production costs. Because of the typical cost structure in cultural industries –​high sunk costs and low marginal costs of production  –​most firms have been sheltered from the price competition accompanying globalization, fuelled by relatively low-​ cost labour in emerging economies. As the mass production of standardized goods and services –​the typical activities that have been outsourced as a consequence of globalization  –​are not common in cultural industries, the key players largely benefited from access to increased markets without incurring changes to their production processes. There are some noticeable exceptions to this, however, such as book printing, which is notably cheaper in Asia thanks to lower labour costs, while activities such as editing and management remain at the original locations. Similarly, the production of CDs, DVDs and Blu-​rays is largely located in Asia. In any event, the increasing share of digitization in these areas is beginning to render physical production costs less important for most firms. Thus, by and large, changes in production costs matter for cultural industries, but, as many are traded as services, the role of these costs is less important than for other industries. Second, not only have countries become more open to trade in terms of their policies but in addition consumers have gradually expanded their taste matrices. As markets open, the variety of products available increases and 121

Cultural Economics

consumers typically enjoy a certain degree of variation in their consumption of goods and services. Especially when it comes to the cultural industries, there has been a massive increase in what is available thanks to these two main social transformations of recent decades: globalization –​legally being allowed to import and export goods and services; and digitization –​ being able to technologically distribute goods and services. Together, these phenomena foster diversity in cultural goods and services. A key aspect of cultural goods and services is that they are experience goods, and therefore information-​intensive. As a result, because of information asymmetries or uncertainty about the content and quality of a cultural product, consumers typically want information before consumption. The advent of the internet has rendered obtaining information relatively cost-​free. Thus, in theory, cultural barriers to the consumption of culture from abroad should decrease as a result of the combination of digitization and globalization:  foreign cultural goods and services are available, and consumers are able to inform themselves about them, which decreases any hurdles or barriers they might have from viewing or listening habits. The more diverse the offerings of cultural goods and services, the more open consumers should be, in theory, as this typically is a reinforcing effect –​and one that could potentially lead to a convergence of tastes across the globe. Moreover, international migration contributes to changing consumption patterns and cultural openness. Many papers on trade patterns find that the number of migrants living in a country is a good predictor of increases in trade flows with the migrants’ origin country (e.g. Felbermayr & Toubal 2008; Schmitz & Hellmanzik 2015; and many others). One example of such a global trend is K-​Pop, which has become an international success story. The South Korean pop band BTS would probably not have had Western audiences in the 1950s or 1960s. The export success of K-​Pop is one of the key factors in South Korea ranking in the top ten exporting countries for audio-​visual services, according to the United Nations Conference on Trade and Development (UNCTAD) database (Albornoz 2016). Lastly, such cultural transmission and possible convergence are further facilitated by the relative ease with which linguistic barriers can be overcome through technology. It is relatively easy to place subtitles on television shows and movies or to translate the lyrics of a South American song from Spanish to English. This is especially true given the advancements 122

Globalization’s impact on cultural sectors

and sophistication of automated translation software available for these tasks. Therefore, the typical barriers to and costs of the consumption of culture from across the world have decreased considerably in the last 40 years. Globalization in numbers I: cultural goods in the European Union An interesting case for analysing cultural trade statistics is the European Union. On the one hand, within the European Union there are no legal barriers such as tariffs on cultural goods and services, while, on the other, there is a plethora of languages and cultural traditions, which might make the cross-​border consumption of goods and services less desirable for some. Indeed, language is identified as a significant barrier to trade in cultural industries but also in other product categories. Moreover, when we look at the European Union we are largely looking at the periphery of the big players in the audio-​visual markets, which are mostly located in the United States. Figure 9.1 illustrates cultural trade statistics within the European Union and from the European Union to the rest of the world in 2017 (Eurostat 2017). On average, we see that about 50 per cent of trade takes place within the European Union while the remaining 50 per cent leaves EU territory and

Figure 9.1  Culture within the European Union: share of extra-​EU and intra-​EU trade within exports of all cultural goods, 2017 Source: Eurostat (2017). 123

Cultural Economics

goes to the rest of the world. Thus, the internal and outgoing trade balance are almost on par. This is more or less comparable to trade in overall goods and services within the European Union, and might be indicative of the fact that, although the European Union is a free-​trade zone, there are persistent preferences for European cultural products around the world. In terms of European cultural products across the globe, the United Kingdom, France and Italy stand out as having the highest share of exports to the rest of the world. When looking at imports into the European Union, we see that there is also a consistently high demand for products from abroad. Europe’s largest trading partners in cultural goods are the United States, with a share of 23.7 per cent in 2017, and Switzerland, with 26.4 per cent (Eurostat 2017). With respect to the trade statistics, all product categories are covered by the European countries, with jewellery, artworks, books, recorded media and antiques accounting for 90 per cent of exports to the rest of the world. The same types of goods are also imported into the European Union, which underlines the idea that consumers seek variety in terms of existing products rather than new products altogether. Perhaps somewhat striking is the fact that the European Union is a relatively large importer of cultural goods and services from the rest of the world. This is particularly true when it comes to video game consoles, which amount to 23.3 per cent of all imports into the European Union. Both these numbers are indicative of a latent demand for high-​tech cultural products and services that cannot be satisfied by EU production. Globalization in numbers II: cultural services across the globe As discussed, digitization heralded a shift in the trade of cultural goods to trade in services, as digital formats replaced physical goods and consumers merely obtain the right of usage rather than actual property rights. Statistics that reflect the trends in trade in cultural services across the globe are presented in Figure 9.2. There are a few countries that are largely engaged in trade in cultural services across the globe, but, for large economies such as the United States, the relative share of cultural services in their total trade balance is relatively small.

124

Globalization’s impact on cultural sectors

Figure 9.2  Relative importance of cultural trade around the globe, 2012 Source: UNCTAD (2012).

The first important point is that most countries that are open to trade are open bidirectionally: they export as well as import goods and services. This is a consequence of the fact that trade is typically a two-​way street, in which openness begets openness, while closing borders and raising tariffs usually ends in a game of retaliation, with both trading partners engaging less in trade. Next, the emerging economies of Mexico, China and India represent countries that participate in global trade in cultural services in a more balanced way, by means of exporting and importing cultural services. These countries illustrate the trend of globalization integrating markets as well as culture. Finally, Canada and, to some extent, the United Kingdom stand out, as they are large exporters of cultural services relative to other industries and the size of their economies, with audio-​visual industries contributing a large share of these exports. This is illustrated by the fact that large exporting countries are typically also large importing countries. However, not all countries participate in these trade flows. The case of Nigeria illustrates this: it does not have an internationally competitive cultural services industry, but it does have large demand for cultural consumption through the internet.

125

Cultural Economics

Art markets go global One of the major items in international cultural trade is trade in fine art. As paintings and sculptures can trade at very high prices, they have more weight in statistics even when traded volumes are relatively small. Moreover, artworks also constitute an important element of capital flows between countries, as paintings, for example, carry consumption as well as investment aspects in a tangible way from one trading partner to the next. This became particularly prevalent during the financial crisis, with art market volumes soaring and prices reaching new record highs, resulting in ever larger values of artworks traded across the globe. With globalization and the international integration of markets, we also observe an increase in wealth in many emerging economies. As owning fine art is a sign of status and wealth, it is a luxury good, and demand for it arises only after consumers have reached a certain income threshold. Many wealthy individuals in emerging economies started engaging in the art market from the early 2000s. Probably one of the most striking examples of this trend is the purchase of Leonardo da Vinci’s Salvator Mundi at Christie’s in 2017 by Prince Badr bin Abdullah of Saudi Arabia for US$450 million, making it the world’s most expensive painting. The painting was destined to be displayed at Louvre Abu Dhabi; however, after some mystery over its whereabouts, it is currently believed to be in Switzerland (Kirkpatrick 2019). This illustrates that rare cultural pieces not only garner international attention but also travel the globe much more widely, thanks to the increasing geographic diversity of art collectors. Similarly, art pieces originating from all over the world are increasingly being sold on the primary and secondary markets in a wider range of locations. As discussed in Chapter 3, one prominent example is the rise of Zeng Fanzhi, who is the top contemporary Chinese artist on the market, with his painting The Last Supper famously selling for US$23.3 million in Hong Kong in 2013. Figure  9.3 summarizes these trends in art market trade. Before the 2000s art market trade was largely in the hands of the United Kingdom and United States, not just because the two major auction houses are situated there, but mainly because of the fact that these countries have a

126

Globalization’s impact on cultural sectors

Figure 9.3  Trends in art market trade: China’s entry into the top art markets, 2007–​2017 Source: McAndrew (2017).

high concentration of wealthy individuals who are able to participate in these high-​end markets. So, even wealthy individuals from other countries were accustomed to participating in art markets in the United States or United Kingdom. Of course, other countries participate in the global art market as well, but their combined market share was only as large as the United Kingdom’s in 2007. What is most striking in Figure 9.3 is that China’s share in the market has experienced tremendous growth, and almost tripled between 2007 and 2011  –​a window of four years  –​and converged to levels slightly above the United Kingdom, of about a quarter to a fifth of the market. This illustrates how globalization has brought new and serious players into art markets, who not only enter the market sporadically but also become incumbents in their own right, shifting the balance of global art markets considerably. The many Asian art fairs, galleries and auction houses that exist today can be considered a sign of Asia’s increasing economic strength, wealth and –​perhaps –​cultural independence. After all, with the extremely high growth experienced by many Asian countries in the last few decades, there is now a critical mass of consumers who are willing and able to afford high-​ end art. This is further underlined by the fact that Christie’s and Sotheby’s

127

Cultural Economics

have several branches across Asia, while many of the large art fairs have established an Asian or Middle Eastern leg, such as Art Basel Hong Kong or Art Basel Abu Dhabi. Next to the appreciation of various art forms from Asia as well as from the West, which all sell well in China and other Asian countries, the financial markets also spur on this trend, as Asian investors, too, are looking to diversify their investment portfolios by means of artworks, especially following the financial crisis. It is fair to say that ever more globalized and capitalized art markets are reflective of art collectors’ tastes and portfolio choices, which have evolved with these major societal changes. The financial crisis and the search for safe investments at a time of market volatility illuminates how globalized culture had become over the preceding decades. Cultural exceptions and the dissemination of tastes Globalization was possible only as a result of the changing attitudes in countries, which resulted in legal changes in terms of tariffs and other barriers to trade. For the most part, countries agreed on opening trade across sectors, but cultural products (as well as agricultural produce) have been the most disputed trade categories during these negotiations. This reflects the fact that cultural goods and services are a core part of a country’s identity, and language, in particular, was a sensitive topic in non-​English-​speaking countries. Perhaps this partially explains why the cultural industries constitute the sector with the lowest open trade commitments among WTO member countries, with only 30 of the 159 members agreeing to open trade in cultural services during the Uruguay Round of the General Agreement on Trade in Services (GATS) by January 2009. Although the United States, China and Japan have committed to open trade in cultural services, the remaining 129 countries, most notably all the EU countries, insisted on “cultural exceptions” during the negotiations. Ultimately, the measures in place to restrict media from abroad are typically on movies, while restrictions on foreign content on television as well as radio and the ownership of cultural institutions such as broadcasting companies by foreign entities are less common. Restrictions can be found in terms of quotas on domestic-​language content (a maximum percentage of foreign content to 128

Globalization’s impact on cultural sectors

be broadcast), subsidies supporting national cultural industries and limits to importable quantities. In an international study on trade patterns in cultural services, Hellmanzik and Schmitz (2016) find that such “cultural exemptions”, as described above, really are effective in limiting trade in culture; in other words, countries that impose restrictions do indeed import less cultural services from abroad. However, this comes at the cost of a detrimental effect on exports. Countries that impose restrictions also export less of their own cultural services to the rest of the world. Ultimately, this implies that countries that have “cultural exemption measures” in place have lower product variety and their domestic industries have lower growth potential stemming from global markets. Of course, a case for protectionism can be made, the argument being that cultural products from larger economies will displace those from smaller countries, thus making cultural exemptions a legitimate tool to prevent such a scenario. However, as consumers have a latent preference for domestic products in any event, it seems unlikely that this will be the case. Economists call this a home bias: an increased taste for products and services from home or countries of close cultural or geographical proximity. Ferreira and Waldfogel (2013) find evidence of exactly this effect for global music consumption using data on international music charts. In fact, their study shows that home bias not only persisted during the phase of markets opening to trade in music but that it increased. They provide evidence that new technologies do not affect the share of domestic music consumed. Altogether, this indicates that consumers regulate cultural markets best through their own tastes and preferences, which in turn shape markets without policy makers needing to intervene on their behalf. Lastly, when considering the statistics presented above and the fact that the European Union has a rather restricted policy when it comes to cultural trade, one might think that Brexit will provide the United Kingdom with new opportunities to trade its music, shows, films and books. Although this may well be the case vis-​à-​vis the rest of the world, the United Kingdom would in fact become a third-​party nation to the European Union, to which cultural exemptions would also apply. Not only would this be a loss in terms of cultural variety to both continental Europe and the United Kingdom but it would also hit the UK industry sharply, as one of its key markets is the European Union. Culture 129

Cultural Economics

is no exception to the general rule that trade will become costlier, and possibly more restricted, when the United Kingdom leaves the European common market. However, as the United Kingdom is one of the main exporters of cultural goods and services, in particular audio-​visual services, books and fine art, the European cultural landscape will certainly experience a sharp change. Case study: opera and orchestras around the globe It is easier for some industries to benefit from the major societal transformations entailed by globalization and digitization than for others. It is no coincidence that I focused on audio-​visual industries and art markets above, as those are privately traded sectors that are largely independent of public funding as well as infrastructure in their production. However, when we think of the major orchestras and opera companies across the globe, we also observe the impact of globalization way beyond the typical tourist masses flooding into the New  York Metropolitan Opera House or the Viennese Staatsoper. A Chinese tourist visiting the Viennese opera is counted as an Austrian export of a cultural service to China by statistical offices. Thus, the increase in trade in cultural services in part can also be explained by increased tourism flows around the globe. And it is easy to see that many of the large cultural institutions present themselves in this market, such as the Rijksmuseum discussed in Chapter 5, as well as the Sydney Opera House, which offers several guided tours through the premises as well as daytime shows for the many people seeking to visit. Moreover, a lot of the leading symphony orchestras have diversified their ensembles, with many East Asian musicians now in the cast of major orchestras as well as many successful solo artists, such as Lang Lang or Sara Chang (as discussed in Yoshihara 2007). This reflects the fact that East Asian classical musicians are rigorously trained, and their skills are such that their representation around the globe was perhaps overdue. At the same time, there is waning interest both in becoming a professional classical musician and in attending classical concerts among other ethnic groups. Thus, the composition of US orchestras changing towards a higher percentage of members of East Asian descent reflects another aspect of globalization, 130

Globalization’s impact on cultural sectors

namely migration. This shift in orchestral composition was largely made possible by second-​or third-​generation Asian Americans, as well as current migrants to the United States (Day 1994). On the other hand, when we look at the market for classical music and live performances it is also clear that Asians have a strong liking for classical music, and therefore performances are in high demand. So, if providers of live classical musical experiences want to take this into account, it seems logical that the share of Asians in their ensembles will increase, even though Asians might still be under-​represented in ensembles as of now. In addition, many of the large and world-​famous orchestras also seek to take advantage of the global market by means of touring, in a manner similar to pop stars. For most orchestras, this means that, when their concert hall is closed for summer, the cast, or part thereof, tours the world and plays shows in other major concert halls across the world. Thereby, they expand their market reach while gaining in popularity and also increasing their profits. For example, the Oslo Philharmonic Orchestra began touring the world in 2012 and has travelled every year since then with stops in the United Kingdom, Hong Kong and Taiwan. Although no statistics are available on the proceeds of such tours, it seems fair to assume that the same industrial considerations apply as discussed above for the case of pop music. There are complementarities between record sales or streaming proceeds, respectively, as well as ticket sales to live performances. And, with waning profits from domestic audiences, orchestras are availing themselves of globalization by branching out into new markets. Lastly, another important trend in the market for classical music is the broadcasting of opera performances, either in cinemas or as digital copies. Usually these are major performances by the big opera houses, such as the New York Metropolitan Opera, which can reach a critical mass not only in filling their own opera house but also in many cinemas across the globe. We have a polarization of the market along the lines of the winner-​takes-​all phenomenon described in Chapter 4, and the Metropolitan Opera is a superstar when it comes to opera productions. The most prolific example is probably its 2010 production of Wagner’s four-​opera cycle Der Ring des Nibelungen. The production of the piece was highly innovative, using what was dubbed “a machine” –​a rotating metal contraption to move the stage throughout the piece. The Metropolitan Opera 131

Cultural Economics

calls it a “groundbreaking production” (Goodwin 2018) and it was sold out for two runs of the opera, whereas the typical selling rate stood at 69 per cent of seats on average (Salazar 2019). In order to further market its production, the Metropolitan Opera released a documentary, Wagner’s Dream, about the production of the set in 2012. Moreover, the Metropolitan Opera’s interpretation of the Ring cycle has been broadcast in cinemas across the globe. Thus, locally bound cultural industries such as operas and orchestras have sought various channels through which they can benefit from globalization, mostly by exploiting complementarities to their core business. Removing local restrictions and being able to cater to a larger market might be a key element in maintaining local production capacities, with all the prestige and externalities they bring. The means used to this end are specific to the industry; however, they certainly go beyond distribution, by changing and adjusting products to the tastes of a new, global audience. Summary • Trade opportunities have opened new markets for cultural industries. • There has been an increase in market reach thanks to the transition from goods to service industry for the audio-​visual sector. • Emerging economies have become target markets as well as key players in cultural industries, which in turn change markets. • China has become a growing force in art markets, surpassing the United Kingdom’s market share. • Protectionist measures in trade in culture are effective, yet they exclude countries from the full benefits of trade by also inhibiting exports. • Localized cultural industries such as operas and orchestras adapt to changed audiences and reach a wider market through tourism, touring and broadcasting.

132

10

Conclusion

The cultural industries, with their many different books, films, songs and artworks, contribute in large part to identity formation, enjoyment and personal development. As such, they largely shape our lives and identities, as individuals as well as entire nations. At the same time, they are products and services like any other commodity; they are, perhaps, of more sentimental value, but they are still traded and sold in markets like anything else. As a result of the special function that culture has for the public in general, it is all the more important to understand the economics of its production and consumption –​in short: the market for culture. This is where the economic toolbox helps to unlock some of the key dynamics of the sector, helping us to understand why we observe the prices, quantities, policies and consumption patterns that we do. Of course, economists by their very profession focus only on those aspects of the cultural industries that can be captured with their theoretical and empirical tools. These are by no means exhaustive, and always need to be contextualised in the specific academic discipline associated with a particular cultural sector. An economist cannot explain the beauty of a Hemingway or a Picasso in terms of its composition or its innovative value in terms of the craft. However, when it comes to analysing the masterminds behind creative production, as well as the patterns that help explain why some cultural pieces have a lasting impact while others do not, economists most certainly can add to the discussion. Especially in light of the major changes we have seen in recent decades and the impact they have had on the cultural industries, economics makes a valuable contribution to practitioners as well as academics by offering insight. If we want to understand why a single artwork can sell for US$450 million, the artistic valuation alone will certainly not tell the whole story. Neither will globalization or financial markets. However, if art market 133

Cultural Economics

and art historian expertise go hand in hand with economic knowledge, such price records might seem less beyond our grasp. The same is certainly true for other cultural markets, such as the music industry, or others that we have covered in this book. Similarly, if we think about the many ways cultural consumption has changed in face of digitization and globalization, economists can apply their models to analyse these patterns in aggregate. This is generally important, as statistical tools and ever more sophisticated means of obtaining data and subsequently analysing them allow us to understand the world of culture better. In other words, these tools let us go beyond the dynamics of a single case by using methods and data that allow a specific question in the realm of culture to be analysed with full rigour, and controlling for all other possible factors that might impact the outcome one wishes to analyse. Many of the articles discussed in this book ask questions of the realm of cultural industries that are, in essence, empirical. One can use theory in order to understand the possible channels by which markets are influenced. However, ultimately, we need data on real-​world demand and supply in order to obtain an understanding of market dynamics and their determinants. It is one thing to deduce from theory how digitization affects production costs, and it is quite another to assess the actual impact on revenues or quality in the music business. This is why economists studying culture can add much value to discussions in the public as well as academic and practitioners’ realms, as they are unique in their ability to combine data tools with sophisticated, state-​of-​the-​art statistical methods in order to obtain insights on cultural products and services. And, if we want to make this claim even bigger, we could say that economists are able to unpack the economics behind arts by means of their theories and empirical methods. This also brings us to the key points of the book. The lens of an economist undoubtedly sheds light on the economics of art and culture. In many ways, however, the book highlights the need for information and comprehensive research on individual art forms and industries in order to inform such statistical analysis. Many of the scientific works collated for this book, and the many case studies and examples underpinning trends in the data and illustrating economic concepts, develop their full potential only when they are placed in the right context and informed by the relevant fields studying the art form in question. 134

Conclusion

Economics funnels its analysis from the general, average case right down to the particular application, where the key dynamics should hold true if certain aspects of the product or the industry are applicable. It is this systematic approach that is the strength of an economic analysis of culture. In light of the many large transformations we have seen affecting cultural markets in recent years, the role of economics has increased in importance. After all, theatres and musicians, violinists and street artists, are doing what they always have done. However, the market conditions have changed over time, and the best way to adapt can often be informed by economists, who can help provide an understanding of the dynamics of the market. Moreover, the role of new technologies has gained so much importance that no art form or gatekeeper will be able to survive without embracing the new possibilities that technology affords. And, for many of the industries and examples, we have seen that it seems clear that adaptation is the only means to ensure survival. When it comes to the field of cultural economics, one of the key challenges is to obtain data with which to answer many of the yet unanswered questions. As museums and archives are beginning to digitize their information, it will be easier to access many more data sources. Then again, Spotify, Netflix and Amazon, as well as many other large cultural digital companies, are notoriously secretive with their data. However, many of the market developments are analysable only if we have the data available to study the implications of market dynamics for prices, the variety produced and consumed and many more issues. And, finally, in these times of Brexit and many countries seeking a more protective stance on trade, it seems that there is a case for cultural economists to inform policy makers of the possible consequences of such policies. Similarly, with tighter budgets in many cities across the globe and demographics changing considerably in Western countries, it is important to understand which provision of arts and culture is economically and societally meaningful. And “crunching the numbers” in order to make better decisions is an inevitable part of making such distributional decisions. This book seeks to provide a first glimpse into economic concepts, as well as the state of the art of research on culture in economics, in order to provide practitioners and policy makers, present and future, with a unified and coherent vantage point, which can help inform debate on culture, its market and its public management when relevant. 135

References

Aisen, A. & F. Veiga 2011. “How does political instability affect economic growth?”, Working Paper 11/​12. Washington, DC: International Monetary Fund. Albornoz, L. 2016. “Diversity and the film industry: an analysis of the 2014 UIS survey on feature film statistics”, Information Paper 29. Montreal:  UNESCO Institute for Statistics. Azoulay, P., J. Graff Zivin & J. Wang 2010. “Superstar extinction”. Quarterly Journal of Economics 125 (2): 549–​89. doi: 10.1162/​qjec.2010.125.2.549. Barro, R. 1996. “Democracy and growth”. Journal of Economic Growth 1 (1): 1–​27. doi: 10.1007/​bf00163340. Bartmanski, D. & I. Woodward 2018. “Vinyl record: a cultural icon”. Consumption Markets and Culture 21 (2): 171–​7. doi: 10.1080/​10253866.2016.1212709. Beck, J. 2004. “Fixed, focal, fair? Book prices under optional resale price maintenance”, Discussion Paper SP II 2004–​15. Berlin: Social Science Research Center Berlin. Beggs, A. & K. Graddy 1997. “Declining values and the afternoon effect: evidence from art auctions”. RAND Journal of Economics 28 (3): 544–​65. doi: 10.2307/​2556028. Booz and Company 2013. “Rijksmuseum Grand National Product – the economic value and impact of the new Rijksmuseum”. Available at: www.rijksmuseum. nl/en/press/press-releases/the-new-rijksmuseum-boosts-the-dutch-economy (accessed 20 February 2020). Borowiecki, K. 2017. “How are you, my dearest Mozart? Well-​being and creativity of three famous composers based on their letters”. Review of Economics and Statistics 99 (4): 591–​605. doi: 10.1162/​REST_​a_​00616. Bosher, H. 2019. “Katy Perry liable for US$2.8m for Dark Horse ‘copyright infringement’ –​but the real loser is the music industry”. The Conversation, 9 August. Available at:  https://​theconversation.com/​katy-​perry-​liable-​for-​us-​2-​8m-​for-​ dark-​horse-​copyright-​infringement-​but-​the-​real-​loser-​is-​the-​music-​industry-​ 121705 (accessed 20 February 2020). Budzinski, O. & S. Gaenssli 2018. “The economics of social media stars: an empirical investigation of stardom, popularity, and success on YouTube”. Economics Discussion Paper 112. Ilmenau, Germany: Ilmenau University of Technology, Institute of Economics. 137

References

Caves, R. 2000. Creative Industries: Contracts between Art and Commerce. Cambridge, MA: Harvard University Press. Chan, T. & J. Goldthorpe 2007. “Social stratification and cultural consumption:  music in England”. European Sociological Review 23 (1):  1–​ 19. doi: 10.1093/​esr/​jcl016. Collins, A., J. McKenzie & L. Vaughan Williams 2019. “When is a talent contest not a talent contest? Sequential performance bias in expert evaluation”. Economics Letters 177: 94–​8. doi: 10.1016/​j.econlet.2019.01.029. Day, A. 1994. “A shift in composition: Asian and Asian American musicians increasingly can be found playing in U.S.  symphony orchestras. ‘This is a manifestation of a normal cycle in American musical life,’ says Joseph Polisi, president of Juilliard”. Los Angeles Times, 3 April. Available at: www.latimes.com/​archives/​ la-​xpm-​1994-​04-​03-​ca-​41613-​story.html (accessed 20 February 2020). Eurostat 2017. “Culture statistics  –​international trade in cultural goods:  intra-​ and extra-​EU trade”. 6 February. Available at:  https://​ec.europa.eu/​eurostat/​ statistics-​explained/​index.php?title=Culture_​statistics_​-​_​international_​trade_​ in_​cultural_​goods (accessed 20 February 2020). Felbermayr, G. & F. Toubal 2008. “Revisiting the trade–​migration nexus: evidence from new OECD data”. Available at https://​ssrn.com/​abstract=1144063 (accessed 20 February 2020). Ferreira, F. & J. Waldfogel 2013. “Pop internationalism: has half a century of world music trade displaced local culture?”. Economic Journal 123 (569):  634–​64. doi: 10.1111/​ecoj.12003. Fishwick, F. 2008. “Book prices in the UK since the end of retail price maintenance”. International Journal of the Economics of Business 15 (3): 359–​77. doi: 10.1080/​ 13571510802465120. Frey, B. 2019. “The artists’ labour market”. In Economics of Art and Culture: 31–​8. Cham: Springer. Frey, B. 2020. “Public support”. In Handbook of Cultural Economics, 3rd edn, R. Towse & T. Navarette Hernández (eds): 449–​56. Cheltenham: Edward Elgar. Galenson, D. & B. Weinberg 2000. “Age and the quality of work: the case of modern American painters”. Journal of Political Economy 108 (4): 761–​77. doi: 10.1086/​ 316099. Galton, F. 1869. Hereditary Genius. London: Macmillan. Ginsburgh, V. 2003. “Awards, success and aesthetic quality in the arts”. Journal of Economic Perspectives 17 (2): 99–​111. doi: 10.1257/​089533003765888458. Ginsburgh, V. & J. van Ours 2003. “Expert opinion and compensation: evidence from a musical competition”. American Economic Review 93 (1): 289–​96. doi: 10.1257/​ 000282803321455296.

138

References

Goetzmann, W., L. Renneboog & C. Spaenjers 2011. “Art and money”. American Economic Review 101 (3): 222–​6. doi: 10.1257/​aer.101.3.222. Goldin, C. & C. Rouse 2000. “Orchestrating impartiality:  the impact of ‘blind’ auditions on female musicians”. American Economic Review 90 (4):  715–​41. doi: 10.1257/​aer.90.4.715. Goodwin, J. 2018. “Rise of the machine”. Metropolitan Opera, 18 October. Available at:  www.metopera.org/​discover/​articles/​rise-​of-​the-​machine (accessed 20 February 2020). Graddy, K. & C. Lieberman 2018. “Death, bereavement, and creativity”. Management Science 64 (10): 4505–​14. doi: 10.1287/​mnsc.2017.2850. Gutiérrez-​Navratil, F. et  al. 2017. “Do movie majors really collude? Indirect evidence from release schedules”. Revista Hacienda Pública Española 221 (2): 9–​31. doi: 10.7866/​HPE-​RPE.17.2.1. Harmon, S. 2019. “‘It has created a sense of hostility’: how Kaws made the art world pay attention”. The Guardian, 19 September. Available at:  www.theguardian. com/​artanddesign/​2019/​sep/​19/​kaws-​artist-​exhibitons-​melbourne-​london-​ brooklyn (accessed 20 February 2020). Hellmanzik, C. 2010. “Location matters:  estimating cluster premiums for prominent modern artists”. European Economic Review 54 (2): 199–​218. doi: 10.1016/​ j.euroecorev.2009.06.001. Hellmanzik, C. 2013. “Democracy and economic outcomes:  evidence from the superstars of modern art”. European Journal of Political Economy 30:  58–​69. doi: 10.1016/​j.ejpoleco.2013.01.001. Hellmanzik, C. & M. Schmitz 2015. “Virtual proximity and audiovisual services trade”. European Economic Review 77: 82–​101. doi: 10.1016/​j.euroecorev.2015.03.014. Hellmanzik, C. & M. Schmitz 2016. “The impact of cultural exceptions: audiovisual services trade and trade policy”. Applied Economics Letters 23 (10):  695–​700. doi: 10.1080/​13504851.2015.1100244. Hermosilla, M., F. Gutierrez-​Navratil & J. Prieto-​Rodriguez 2018. “Can emerging markets tilt global product design? Impacts of Chinese colorism on Hollywood castings”. Marketing Science 37 (3): 356–​81. doi: 10.1287/​mksc.2018.1089. Hoxby, C. 2000. “Does competition among public schools benefit students and taxpayers?”. American Economic Review 90 (5):  1209–​38. doi:  10.1257/​ aer.90.5.1209. Hulst, T. 2007. “The Leo Castelli Gallery”. Archives of American Art Journal 46 (3/​ 4): 14–​27. doi: 10.1086/​aaa.46.3_​4.25435132. Kirkpatrick, D. 2019. “A Leonardo made a $450 million splash. Now there’s no sign of it”. New York Times, 30 March. Available at: www.nytimes.com/​2019/​03/​30/​arts/​ design/​salvator-​mundi-​louvre-​abu-​dhabi.html (accessed 20 February 2020).

139

References

Kreps, D. 2008. “Radiohead publishers reveal ‘In Rainbows’ numbers”. Rolling Stone, 15 October. Available at: www.rollingstone.com/​music/​music-​news/​radiohead-​ publishers-​reveal-​in-​rainbows-​numbers-​67629/​ (accessed 20 February 2020). Krueger, A. 2005. “The economics of real superstars: the market for rock concerts in the material world”. Journal of Labor Economics 23: 1–​30. doi: 10.1086/​425431. Krueger, A. 2019. Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us about Economics and Life. London: John Murray. McAlpine, F. 2018. “10 artists who hate their biggest hit”. BBC, 8 June. Available at: www.bbc.co.uk/​music/​articles/​2b5f1d76-​a6ff-​46bb-​8ac0-​b68542f97592 (accessed 20 February 2020). McAndrew, C. 2017. The Art Market 2017. Dundrum, Ireland: Arts Economics. McKenzie, J. 2009. “Illegal music downloading and its impact on legitimate sales: Australian empirical evidence”. Australian Economic Papers 48 (4): 296–​ 307. doi: 10.1111/​j.1467-​8454.2009.00377.x. Mandel, B. 2009. “Art as an investment and conspicuous consumption good”. American Economic Review 99 (4): 1653–​63. doi: 10.1257/​aer.99.4.1653. Mulligan, C., R. Gil & X. Sala-​i-​Martin 2004. “Do democracies have different public policies than nondemocracies?”. Journal of Economic Perspectives 18 (1): 51–​74. doi: 10.1257/​089533004773563430. Mulligan, C. & K. Tsui 2006. “Political competitiveness”. Working Paper 12653. Cambridge, MA: National Bureau of Economic Research. Mulligan, C. & K. Tsui 2008. “Political entry, public policies, and the economy”. Working Paper 13830. Cambridge, MA:  National Bureau of Economic Research. Nagaraj, A. & I. Reimers 2019. “Digitization and the demand for physical works: evidence from the Google Books project”. Available at https://​ssrn.com/​ abstract=3339524 (accessed 20 February 2020). Naroll, R. et al. 1971. “Creativity: a cross-​historical pilot survey”. Journal of Cross-​ Cultural Psychology 2 (2): 181–​8. doi: 10.1177/​002202217100200207. Nielsen 2019. US Music End-​Year Report 2018. New York: Nielsen. Oosterlinck, K. 2017. “Art as a wartime investment: conspicuous consumption and discretion”. Economic Journal 127 (607): 2665–​701. doi: 10.1111/​ecoj.12391. Peukert, C. & I. Reimers 2019. “Digital disintermediation and efficiency in the market for ideas”. Available at https://​ssrn.com/​abstract=3110105 (accessed 20 February 2020). Potrafke, N. 2010. “Does government ideology influence deregulation of product markets? Empirical evidence from OECD countries”. Public Choice 143 (1): 135–​ 55. doi: 10.1007/​s11127-​009-​9494-​z. Potrafke, N. 2011. “Public expenditures on education and cultural affairs in the West German states:  does government ideology influence the budget 140

References

composition?”. German Economic Review 12 (1):  124–​ 45. doi:  10.1111/​ j.1468-​0475.2010.00507.x. Rodrik, D. 1999. “Democracies pay higher wages”. Quarterly Journal of Economics 114 (3): 707–​38. doi: 10.1162/​003355399556115. Rosen, S. 1981. “The economics of superstars”. American Economic Review 71 (5):  845–​ 58. Available at:  www.jstor.org/​stable/​1803469 (accessed 20 February 2020). Sacerdote, B. 2000. “Peer effects with random assignment: results for Dartmouth roommates”. Working Paper 7469. Cambridge, MA:  National Bureau of Economic Research. Salazar, F. 2019. “Wagner’s Ring cycle helps Metropolitan Opera ticket sales improve”. Operawire, 14 May. Available at: https://​operawire.com/​metropolitan-​ opera-​ticket-​sales-​improve (accessed 20 February 2020). Schulze, G. & A. Rose 1998. “Public orchestra funding in Germany:  an empirical investigation”. Journal of Cultural Economics 22 (4): 227–​47. doi: 10.1023/​ A:1007526028884. Shaw, L. & M. Ross 2016. “Netflix’s $5 billion budget is setting off an arms race in cable”. Bloomberg, 2 March. Available at:  www.bloomberg.com/​news/​articles/​ 2016-​03-​02/​media-​companies-​try-​to-​spend-​their-​way-​out-​of-​cable-​tv-​crunch (accessed 20 February 2020). Simonton, D. 1988. “Age and outstanding achievement:  what do we know after a century of research?”. Psychological Bulletin 104 (2):  251–​67. doi:  10.1037/​ 0033-​2909.104.2.251. Simonton, D. 1997. “Creative productivity:  a predictive and explanatory model of career trajectories and landmarks”. Psychological Review 104 (1):  66–​89. doi: 10.1037/​0033-​295x.104.1.66. Spaenjers, C., W. Goetzmann & E. Mamonova 2015. “The economics of aesthetics and record prices for art since 1701”. Explorations in Economic History 57: 79–​94. doi: 10.1016/​j.eeh.2015.03.003. Throsby, D. 1994. “The production and consumption of the arts: a view of cultural economics”. Journal of Economic Literature 32 (1): 1–​29. Available at: www.jstor. org/​stable/​2728421 (accessed 20 February 2020). UNCTAD 2012. “Personal, cultural and recreational services”. Available at: https://​ unctadstat.unctad.org/​wds/​TableViewer/​tableView.aspx (accessed 20 February 2020). UNESCO 2015. Cultural Times:  The First Global Map of Cultural and Creative Industries. Paris: United Nations Economic and Social Council. US Department of Justice 2018. Herfindahl–​Hirschman Index, 31 July. Available at: www.justice.gov/​atr/​herfindahl-​hirschman-​index (accessed 20 February 2020).

141

References

Vaubel, R. 2005. “The role of competition in the rise of Baroque and Renaissance music”. Journal of Cultural Economics 29 (4):  277–​97. doi:  10.1007/​s10824​005-​0699-​9. Waldfogel, J. 2011. “Bye, bye, Miss American Pie? The supply of new recorded music since Napster”. Working Paper 16882. Cambridge, MA: National Bureau of Economic Research. Available at: www.nber.org/​papers/​w16882.pdf (accessed 20 February 2020). Waldfogel, J. 2012a. “Copyright protection, technological change, and the quality of new products: evidence from recorded music since Napster”. Journal of Law and Economics 55 (4): 715–​40. doi: 10.1086/​665824. Waldfogel, J. 2012b. “Copyright research in the digital age:  moving from piracy to the supply of new products”. American Economic Review 102 (3):  337–​42. doi: 10.1257/​aer.102.3.337. Yoshihara, M. 2007. Musicians from a Different Shore: Asians and Asian Americans in Classical Music. Philadelphia, PA: Temple University Press.

142

Index

afternoon effect 78 agglomerations 63, 116 Amazon 63, 76, 79, 107–​9, 112, 117, 135 Amsterdam 54 Apple 63, 117 Art Basel 6, 24, 128 Asian Tiger states (Hong Kong, Singapore, Taiwan, South Korea) 120 auction houses 126 Christie’s 24, 126, 127 Sotheby’s 24, 30, 127 Banksy 1, 2, 30 bargaining power 87 Baumol effect 35 Baumol’s cost disease 35 Beatles 14, 84, 104 Beethoven, Ludwig van 57, 67 bereavement 67 Beyoncé 44 big data 7 Billboard 98 “Bohemian Rhapsody” (song) 1 Bohemian Rhapsody (film) 6 Brexit 129 BRIC countries (Brazil, Russia, India, China) 120 Broadway 63

Castelli, L. 96 Caves, R. 9, Celtic Tiger (Ireland) 120 Chan, T. and Goldthorpe, J. 51 Chang, Sara 130 China 6, 24, 125–​32 clusters 116 comparative advantage 120 complementarity 102 complements 48 consumption good 14, 52, 54, 56, 140 convergence 119, 122 copyright 14 creative clusters 63 cross-​price elasticities  48 crowding out 115 cultural barriers 122 cultural economics 1–​10, 84, 135–​41 cultural entrepreneurs 120 cultural exceptions 128 cultural exemption measures 129 cultural sector 5–​10, 13, 34–​6, 57, 62, 74 da Vinci, Leonardo 23, 84, 126 delayed expert recognition effect 85 demand 2, 3, 10, 13–​7, 43–​50, 119, 140 demand side 77, 83 democracy 67 143

Index

digital disintermediation 114 digitization 4–​6, 38, 102, 107–​14, 119–​24 e-​book reader  113 economic toolbox 2, 8, 133 economies of scale 16, 108, 116 efficient market 15, 16 elasticity 44–​8, 53, 56 cross-​price elasticity  44 elastic 45 income elasticity 44 inelastic 45 own-​price elasticity  44 unit elastic 44 empirical 2 analysis 7 studies 57, 68–​9, 76 equilibrium 15 European Coal and Steel Community 120 European Commission 90 European Union 90 ex ante 74 excludability 16, 30–​34 experience 91 experience good 16–​19, 25, 77 experience goods 13–​14, 25, 74, 86, 88, 122 externality 14, 28, 29, 50 FAANG technology firms (Facebook, Apple, Amazon Netflix, Google) 63 Facebook 61, 63, 117 Fanzhi, Z. 126 Federal Trade Commission 90 file sharing 105 film industry 27, 78, 89, 137

144

fixed book price regime 111 fixed costs 91 free lunch 34 free riding 31 Friends 108 fringe 89 fringe firms 89–​90 Game of Thrones 1–​3, 6, 31–​2 GDP 8, 37, 41, 53, 54 General Agreement on Tariffs and Trade (GATT) 120 General Agreement on Trade in Services (GATS) 128 Germany 34–​41, 137, 141 globalization 6, 10–​11, 22, 24–​5, 119, 122, 125–​6 economic globalization 119 Goethe, J. W. 84 golden ratio 73 Google 39, 63, 90, 117, 140 Google Books project 115–​16 Harry Potter series 17 Hemingway, E. 133 Herfindahl–​Hirschman Index (HHI) 88–​91 Hollywood 6, 63, 78, 116–​18, 121, 139 home bias 129 homo economicus 43 homogeneous products 16 Hong Kong 24, 120, 126, 128, 131 income 15 income elasticity 47 income potential 57 India 120, 125 industry structure 94 inferior goods 47

Index

information 4 information asymmetry 13 information goods 14, 91 international migration 122 investment considerations 43 Iron Man 6 James, E. L. 57 Kant, I. 74 Kaws 97 knowledge spillover 63 Kung Fu Panda 6 La Casa de Papel 108 labour market 57 Lang Lang 130 levels of quality 76 licences to use 104 London 30, 116, 138, 140 long tail distribution 58 luxury goods 48, 126 Madonna 83 Mandel, B. 51 marginal costs 15–​16, 91 marginal private costs 29 marginal social costs 29 of production 121 marginal productivity 35 market 1, 2, 13–​18, 21–​4, 63, 94, 140 market imperfections 34 market outcomes 2, 85, 89 Mars, Bruno 44 Mercury, Freddie 6 Michelangelo 57 Microsoft 117 migration 131 mixed system 34

Monet, Claude 81 monopoly 17 monopolistic competition 77 moral hazard 35 Motown 97 movie industry 59, 90–​1, 107 Mozart 67, 137 museum industry 54 music industry 6 Mutter, A. S. 57 Napster 7, 101, 105, 142 Napster shock 105 Netflix 4, 31–​2, 63, 108–​10, 135, 141 New York 64 normal goods 47 oligopoly 18 omnivore 51 one-​hit wonders  61 Oosterlinck, K. 7 opera 13, 33–​4, 48, 52, 88, 130–​2, 141 New York Metropolitan Opera 130–​1 Viennese Opera 130 opportunity cost 35, 120 orchestra 69 New York Philharmonic Orchestra 69, 70 Oslo Philharmonic Orchestra 131 Paris 64 peer artists 64 peer assessment 79 peer-​to-​peer (P2P) platforms 38, 101, 105 performance 94 Picasso, Pablo 81, 133

145

Index

piracy 32, 38, 50, 101–​2, 105, 142 Piratebay 101 pop 18 Potrafke, N. 41 preferences 44 price sensitivity 3 principal–​agent conflict  35 principal–​agent dynamic  106 private good 27, 31 product differentiation 17 production cost 91 profit 32 Project Gutenberg 115 provision of culture 27 public entities 27 public good 27, 31, 41, 114 quality 73 Queen Elisabeth Competition 81 Radiohead 49, 50, 139 redistribution effects 34 regression analysis 7 Reitlinger, G. 7 Rijksmuseum 54 rivalry 30, 36 rival 30, 31 rivalrous 31, 36 Rothko, M. 22 Rowling, J. K. 37, 57 structure–​conduct–​performance (SCP) paradigm 93 sequence order bias 82 Shakespeare, William 57 Sheeran, Ed 28 short head distribution 58 Silicon Valley 63, 116–​18 Simonton, Dean 66 social welfare 16 146

Soundcloud 1 South Korea 120, 122 Spider-​Man 78 Spotify 38, 101, 104, 106, 135 streaming industry 116 substitutes 48 Suits 43 sunk costs 92, 121 superior good 54 superstar phenomenon 71 superstar theory 58 supply 2, 14–​19, 22–​5, 101, 119, 142 supply curve 15, 29, 45 technology 4 technological change 4, 106, 142 Ticketmaster 106 tourism 54, 56, 130, 132 transactions costs 16, 87 United Kingdom 34, 124 United Nations Conference on Trade and Development (UNCTAD) 122 univore 51, 52 van Gogh, Vincent 1, 57 vertical integration 109 wage 36, 42 welfare 89 well-​being  67 Wikipedia 4 willingness to pay 7, 15–​16, 21, 43, 44–​7, 56–​58 winner-​takes-​all  70 word-​of-​mouth effect  79 World Trade Organization (WTO) 120 YouTube 1, 61, 90, 98, 107, 137