I largely agree with your points, but not regarding resellers. Simply put, resellers do not exist in the online digital music world. Whereas there's a store down the street from me that legally sells used CDs, there is no legal mechanism by which a person or business can resell an mp3. I can't buy an mp3 from Apple then turn around and decide on a price to sell it to someone else.
They whine on about how CD is not as good as vinyl but what they really despise is not the quality of CD vs scratchy vinyl rubbish, its the deomocratization of quality sound that CD brought. There is no perceptible difference in the sound produced by a $50 player or a $500 player, none, zilch, nada.
To your ears and in the context of your system and every other system you have ever heard, I take this statement as Bible truth. My experience, however, differs.
Am I an "audiophile"? I don't know. "Real" audiophiles would say that my stereo rig is "entry level". FWIW, the retail price of my system at the time of purchase is probably in the neighborhood of $5k. I started out with a much cheaper system than that and then the upgrade bug bit me big time. My original CD player was made by a company called NAD, and cost maybe $400-500. I was skeptical that one CD player could sound different from the next. Then I borrowed a CD player made by a company named Rega called the Planet 2000, which cost about $900. I took it home to do a comparison. On the way home I was thinking up a scenario by which my gf would switch back and forth between one CD player to the next without my knowing which one was playing and I'd see if I could tell a difference. Well, she wasn't home yet so I hooked up the Rega. Within 10 seconds of putting in one of my favorite CDs my jaw was on the floor. The difference wasn't just subtle, it was amazing.
I'm a frugal guy. I don't have cable tv. I drive a ten year old car. I pay cash for everything. A big part of me didn't want to tell a difference, but there you have it. The Rega sits on my rack to this day.
As an aside, to all the audiophile bashers out there.... I understand the ridicule, but do realize that there's a huge difference between someone who spends a few grand on a really nice sounding system, and guys who buy $10k speaker cables. Kind of like, oh, I dunno... the difference between a guy like Ron Paul and a Ted Kacyznksi. Both are right of center and very intelligent, but the similarities end there.
Most likely Ticketmaster wrote/bought/developed the software that(venue of your choice) uses at their own box office. Ticketmaster may have even provided the pcs/sales terminals, networking equipment, installed the software, and trained the staff at the venue on how to do everything. Ticketmaster probably gives the venue monthly sales reports and tracks other stats for them. Depending on the nature of their relationship, Ticketmaster will allocate a certain bandwidth(online and in terms of number of operators on the telephone) to that venue for their big onsales. Ticketmaster will also have an employee whose job it is to interface with the venue, help them dole out tickets to the bands, promoters, take care of season tickets, work with promoters on stage and seating layouts, etc. Ticketmaster probably prints and mails/FedEx all the tickets. Ticketmaster is also the ones answering the phones if someone calls to complain about the order or has a problem. Ticketmaster's phone staff also handles all sorts of inquiries about "what day is such and such show, does a 3 yr old need a ticket, can I bring an umbrella inside", etc. While I've never worked for Ticketmaster I used to work in the industry so I'm speaking from some experience.
Ultimately, Ticketmaster-evil as they are-is providing a certain level of service and expertise to a venue that most venues themselves lack. Most venues probably are better off outsourcing a lot of the above mentioned stuff to Ticketmaster than trying to do it themselves. Ticketmaster has been doing it for years and has an economy of scale and a resulting efficiency that no single venue could ever achieve on their own.
"How hard would it be for companies that already sell Ticketmaster tickets to create a business account on ebay to purchase set-priced tickets for customers and print them right there?"
The problem with this is that Ticketmaster wrote and owns the software that tells every pc/terminal that can sell tickets what tickets have already been sold vs what are available. If you want each ticket to have a section, row, and seat number(and believe me, you *DO* want this) then you need the software that keeps track of this info. Without access to the software that does this, how do you keep track of ticket sales? In short, it would be very hard bordering on impossible.
Maybe we take different things away from that Paul Heyne article, but the way I read it he's saying almost exactly the same thing that I did. He's talking about a model of efficiency where goods/services are allocated to those who are willing to pay the highest price for them. He explains it better than I ever could but that's what it boils down to. The last sentence basically says it all. He does a great job in the 3rd to last pagaraph of articulating the criticisms of this model of efficiency but ultimately he comes down on the side of well defined property rights, price as a signal of value, and willingness to pay the highest price as the indicator that one should be the owner of a good.
Re:Alternative efficiency models... if productivity growth continues at the current pace for another 50 or so years I could easily envision modern societies being able to provide a minimum standard of living for all with little strain on taxes/gov't resources. I wouldn't consider such an outcome an 'efficiency', though. As a utilitarian I'd probably say that what you describe is a worthy goal for a society that has the resources to do it, but I don't think it really has anything to do with efficiency. Maybe our disagreement is more one of semantics. I tend to have a rather narrow definition of economic efficiency that doesn't go beyond what's mentioned in the last sentence of the Heyne article.
Incidentally, Bryan Caplan-who blogs on Econlog-is one of my former professors. I don't agree with all of his ideas but if you want to read an economist who thinks outside the box look no further. Some of his ideas are pretty far out there but the man himself is definitely a genius.
I didn't mean to imply anything negative about your school, although now I see how I could have come across that way. I was just curious, nothing more.
Of all the branches of economics microeconomics is certainly the most important and it's also very sound, imo. The basic tools of microeconomics, supply and demand curves, indifference curves, demand elasticities, marginal cost/benefit analysis, all make intuitive sense and can be mathematically modeled. We may not "see" these things working in real life, but it's a way of understanding just about every decision a person or a firm makes. For example, the way that you can use a graph showing where marginal benefit intersects marginal cost and use that to determine the optimal level of consumption/production is about as fundamental and basic as it gets and applies to just about every decision made by an individual or a firm when deciding "how much" of something they want. If you reject the basic tools of micro you're basically rejecting economics as a whole. There's plenty of areas of economics that I'm personally skeptical about(Austrians, monetarists, macro) but I don't buy a criticism of microeconomics unless you've developed your own set of basic tools that you think explains the world better than traditional micro does. I say this with the caveat that, yes, it's very important to understand the limitations of any tool. There's a lot that economics simply doesn't/can't address.
I wouldn't have thought about Pareto efficiency in the Apple/Windows context, that's an interesting application. I think Pareto efficiency is most applicable to common goods problems.
I disagree that most economists would view efficiency as something determined by a value judgement. Whether a market is efficient or not has to do with whether goods are allocated to those with the highest willingness to pay for them, and allowing price to function properly as a signal of the value a good or service has. In this way, resources will flow to where they will be most productive. I'm not sure where value judgements or any normative statements/analysis enter the picture.
Interesting link, dieoff.org. Where did you study economics?
0.8 tons? Example please.
Carpoint(yes, I know that MS is evil)is a good reference. You can lookup the weight of any car.
I don't think Lotus even makes a car that weighs 0.8 tons.
Your BMW 318 probably clocks in at at least 1.5 tons. A Mazda Miata weighs at least a ton.
Sorry to be a nitpicker, but when you put out an "equation" you ought to get the math right.
Not decided if Blu-ray will have component video?
on
Blu-ray Coming Out On Top?
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· Score: 2, Insightful
That seems kind of odd. What would it have instead... S-Video and HMDI?
How do you arrive at that figure? $5.15/hr @40hrs= $206. The employers tab for social security taxes is 6.25% of that, so add $13. Do employers pay a matching portion of the medicare tax, too? If so, add another $2-3. Now we're at $222. Where does the other $275 come from? It can't be health care costs, since we're only talking about what the law requires. Unemployment insurance? Required payments into a workman's comp fund? Maybe you can elaborate?
That's a very good point and I completely agree. When record labels/iTunes are trying to determine the optimal price and they're looking at what % of sales they lose when they raise the price that's definitely something they have to take into consideration:how many of those sales are due to piracy? In the short term the reason for a lost sale probably doesn't matter but long term I think you're right, once you start downloading illegally why pay for anything ever again? What's the long term cost to the music industry of losing an otherwise paying customer because they priced a song too high? I don't know, but it might be expensive.
Lossy compression formats are of little appeal to me, and my computer skills/savvy are probably limited compared to the average user of this site, but I'm amazed at how easy it is to find music online via torrent sites. I'm surprised that iTunes sells as many songs as they do.
The record labels will not want a secondary market for songs because they get no cut of the action. Could they charge a sales commission via iTunes for every user who resells a song? Perhaps. However, the main reason why it is not in their interest to allow a secondary market is because the marginal cost to them of providing a user a song is zero. Selling 1,000 songs costs them the same as selling 2,000. Why would they want any of those sales to be from one user to another when everyone involved could instead be forced to buy it from them in first place?
Your idea about the way the studio execs are thinking of a profit curve is, however, spot on.
I really wish I had a microeconomics textbook in front of me, but I think I can say a few correct things from memory.
Regarding "supply and demand", the thing that makes this situation somewhat unique, as others have pointed out, is that the supply is virtually unlimited. To put this is economic terms, the marginal cost to the supplier of providing one additional unit is effectively zero. The only thing that really matters is demand.
Specifically, what's known in economics as demand elasticity. This is a measure of how responsive consumers are(in terms of quantity purchased) to a change in the price of an item. Simply put, how much of a change in quantity sold will there be in response to a change in price? This is what a seller needs to know when he is thinking about chaning the price of something. Gasoline is the classic example of an inelastic good. Remember when Katrina hit and gas prices spiked? You probably still had to get to work, school, etc, and probably bought about the same amount of gas as before. Plasma/lcd televisions are an example of a good with elastic demand. Not many people have them now but when the price falls by half you'll start to see a lot more people buying them.
Count on the fact that as we speak, there are economists being paid six figure sums by the record labels to do *nothing else* but try to analyze and predict demand elasticity for online music purchases. There's nothing magical about the number 99(cents). I'm not up on current popular music, but when Kanye West's latest album came out, if iTunes had charged $1.00 per track I doubt if they would have sold significantly less copies. Conversely, is there any artist who would sell a lot *more* songs at 98 cents? Probably not. But is there an artist who could sell a lot more songs at 75 cents? Would the increased sales make up for the reduction in price? The answer to both questions might be yes. Is there an artist who might sell less songs at $1.25, but the increased revenue per sale would offset the lost sales vs. a $1.00 price? Quite possibly yes.
Simply put, there's an optimal price for any good. If demand elasticity is known(I explained it conceptually above, but it's something that can be numerically quantified for the purpose of performing calculations) then one can use calculus to easily determine the optimal price for a good. The optimal price is the price which yields the highest revenue. Anyone who's taken even basic calculus has probably done problems like this. You're given the formula, you make the calculation, and then put the result on a graph. Vertical axis is revenue, horizontal axis is price, and your result looks like a parabola in the shape of an upside down U, indicating there is an optimal price to sell the good at. Price it too high and you lose revnue, price it too low and you lose revenue.
Fairness doesn't matter, there's nothing special about the number 99. It's all about how to maximize revenue. My own gut feeling is that some songs are underpriced and others overpriced at 99 cents.
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I largely agree with your points, but not regarding resellers. Simply put, resellers do not exist in the online digital music world. Whereas there's a store down the street from me that legally sells used CDs, there is no legal mechanism by which a person or business can resell an mp3. I can't buy an mp3 from Apple then turn around and decide on a price to sell it to someone else.
Am I an "audiophile"? I don't know. "Real" audiophiles would say that my stereo rig is "entry level". FWIW, the retail price of my system at the time of purchase is probably in the neighborhood of $5k. I started out with a much cheaper system than that and then the upgrade bug bit me big time. My original CD player was made by a company called NAD, and cost maybe $400-500. I was skeptical that one CD player could sound different from the next. Then I borrowed a CD player made by a company named Rega called the Planet 2000, which cost about $900. I took it home to do a comparison. On the way home I was thinking up a scenario by which my gf would switch back and forth between one CD player to the next without my knowing which one was playing and I'd see if I could tell a difference. Well, she wasn't home yet so I hooked up the Rega. Within 10 seconds of putting in one of my favorite CDs my jaw was on the floor. The difference wasn't just subtle, it was amazing.
I'm a frugal guy. I don't have cable tv. I drive a ten year old car. I pay cash for everything. A big part of me didn't want to tell a difference, but there you have it. The Rega sits on my rack to this day.
As an aside, to all the audiophile bashers out there.... I understand the ridicule, but do realize that there's a huge difference between someone who spends a few grand on a really nice sounding system, and guys who buy $10k speaker cables. Kind of like, oh, I dunno... the difference between a guy like Ron Paul and a Ted Kacyznksi. Both are right of center and very intelligent, but the similarities end there.
Most likely Ticketmaster wrote/bought/developed the software that(venue of your choice) uses at their own box office. Ticketmaster may have even provided the pcs/sales terminals, networking equipment, installed the software, and trained the staff at the venue on how to do everything. Ticketmaster probably gives the venue monthly sales reports and tracks other stats for them. Depending on the nature of their relationship, Ticketmaster will allocate a certain bandwidth(online and in terms of number of operators on the telephone) to that venue for their big onsales. Ticketmaster will also have an employee whose job it is to interface with the venue, help them dole out tickets to the bands, promoters, take care of season tickets, work with promoters on stage and seating layouts, etc. Ticketmaster probably prints and mails/FedEx all the tickets. Ticketmaster is also the ones answering the phones if someone calls to complain about the order or has a problem. Ticketmaster's phone staff also handles all sorts of inquiries about "what day is such and such show, does a 3 yr old need a ticket, can I bring an umbrella inside", etc. While I've never worked for Ticketmaster I used to work in the industry so I'm speaking from some experience.
Ultimately, Ticketmaster-evil as they are-is providing a certain level of service and expertise to a venue that most venues themselves lack. Most venues probably are better off outsourcing a lot of the above mentioned stuff to Ticketmaster than trying to do it themselves. Ticketmaster has been doing it for years and has an economy of scale and a resulting efficiency that no single venue could ever achieve on their own.
"How hard would it be for companies that already sell Ticketmaster tickets to create a business account on ebay to purchase set-priced tickets for customers and print them right there?"
The problem with this is that Ticketmaster wrote and owns the software that tells every pc/terminal that can sell tickets what tickets have already been sold vs what are available. If you want each ticket to have a section, row, and seat number(and believe me, you *DO* want this) then you need the software that keeps track of this info. Without access to the software that does this, how do you keep track of ticket sales? In short, it would be very hard bordering on impossible.
Maybe we take different things away from that Paul Heyne article, but the way I read it he's saying almost exactly the same thing that I did. He's talking about a model of efficiency where goods/services are allocated to those who are willing to pay the highest price for them. He explains it better than I ever could but that's what it boils down to. The last sentence basically says it all. He does a great job in the 3rd to last pagaraph of articulating the criticisms of this model of efficiency but ultimately he comes down on the side of well defined property rights, price as a signal of value, and willingness to pay the highest price as the indicator that one should be the owner of a good.
Re:Alternative efficiency models... if productivity growth continues at the current pace for another 50 or so years I could easily envision modern societies being able to provide a minimum standard of living for all with little strain on taxes/gov't resources. I wouldn't consider such an outcome an 'efficiency', though. As a utilitarian I'd probably say that what you describe is a worthy goal for a society that has the resources to do it, but I don't think it really has anything to do with efficiency. Maybe our disagreement is more one of semantics. I tend to have a rather narrow definition of economic efficiency that doesn't go beyond what's mentioned in the last sentence of the Heyne article.
Incidentally, Bryan Caplan-who blogs on Econlog-is one of my former professors. I don't agree with all of his ideas but if you want to read an economist who thinks outside the box look no further. Some of his ideas are pretty far out there but the man himself is definitely a genius.
I didn't mean to imply anything negative about your school, although now I see how I could have come across that way. I was just curious, nothing more.
Of all the branches of economics microeconomics is certainly the most important and it's also very sound, imo. The basic tools of microeconomics, supply and demand curves, indifference curves, demand elasticities, marginal cost/benefit analysis, all make intuitive sense and can be mathematically modeled. We may not "see" these things working in real life, but it's a way of understanding just about every decision a person or a firm makes. For example, the way that you can use a graph showing where marginal benefit intersects marginal cost and use that to determine the optimal level of consumption/production is about as fundamental and basic as it gets and applies to just about every decision made by an individual or a firm when deciding "how much" of something they want. If you reject the basic tools of micro you're basically rejecting economics as a whole. There's plenty of areas of economics that I'm personally skeptical about(Austrians, monetarists, macro) but I don't buy a criticism of microeconomics unless you've developed your own set of basic tools that you think explains the world better than traditional micro does. I say this with the caveat that, yes, it's very important to understand the limitations of any tool. There's a lot that economics simply doesn't/can't address.
I wouldn't have thought about Pareto efficiency in the Apple/Windows context, that's an interesting application. I think Pareto efficiency is most applicable to common goods problems.
I disagree that most economists would view efficiency as something determined by a value judgement. Whether a market is efficient or not has to do with whether goods are allocated to those with the highest willingness to pay for them, and allowing price to function properly as a signal of the value a good or service has. In this way, resources will flow to where they will be most productive. I'm not sure where value judgements or any normative statements/analysis enter the picture.
Interesting link, dieoff.org. Where did you study economics?
0.8 tons? Example please. Carpoint(yes, I know that MS is evil)is a good reference. You can lookup the weight of any car. I don't think Lotus even makes a car that weighs 0.8 tons. Your BMW 318 probably clocks in at at least 1.5 tons. A Mazda Miata weighs at least a ton. Sorry to be a nitpicker, but when you put out an "equation" you ought to get the math right.
That seems kind of odd. What would it have instead... S-Video and HMDI?
How do you arrive at that figure? $5.15/hr @40hrs= $206. The employers tab for social security taxes is 6.25% of that, so add $13. Do employers pay a matching portion of the medicare tax, too? If so, add another $2-3. Now we're at $222. Where does the other $275 come from? It can't be health care costs, since we're only talking about what the law requires. Unemployment insurance? Required payments into a workman's comp fund? Maybe you can elaborate?
That's a very good point and I completely agree. When record labels/iTunes are trying to determine the optimal price and they're looking at what % of sales they lose when they raise the price that's definitely something they have to take into consideration:how many of those sales are due to piracy? In the short term the reason for a lost sale probably doesn't matter but long term I think you're right, once you start downloading illegally why pay for anything ever again? What's the long term cost to the music industry of losing an otherwise paying customer because they priced a song too high? I don't know, but it might be expensive. Lossy compression formats are of little appeal to me, and my computer skills/savvy are probably limited compared to the average user of this site, but I'm amazed at how easy it is to find music online via torrent sites. I'm surprised that iTunes sells as many songs as they do.
The record labels will not want a secondary market for songs because they get no cut of the action. Could they charge a sales commission via iTunes for every user who resells a song? Perhaps. However, the main reason why it is not in their interest to allow a secondary market is because the marginal cost to them of providing a user a song is zero. Selling 1,000 songs costs them the same as selling 2,000. Why would they want any of those sales to be from one user to another when everyone involved could instead be forced to buy it from them in first place? Your idea about the way the studio execs are thinking of a profit curve is, however, spot on.
Regarding "supply and demand", the thing that makes this situation somewhat unique, as others have pointed out, is that the supply is virtually unlimited. To put this is economic terms, the marginal cost to the supplier of providing one additional unit is effectively zero. The only thing that really matters is demand.
Specifically, what's known in economics as demand elasticity. This is a measure of how responsive consumers are(in terms of quantity purchased) to a change in the price of an item. Simply put, how much of a change in quantity sold will there be in response to a change in price? This is what a seller needs to know when he is thinking about chaning the price of something. Gasoline is the classic example of an inelastic good. Remember when Katrina hit and gas prices spiked? You probably still had to get to work, school, etc, and probably bought about the same amount of gas as before. Plasma/lcd televisions are an example of a good with elastic demand. Not many people have them now but when the price falls by half you'll start to see a lot more people buying them.
Count on the fact that as we speak, there are economists being paid six figure sums by the record labels to do *nothing else* but try to analyze and predict demand elasticity for online music purchases. There's nothing magical about the number 99(cents). I'm not up on current popular music, but when Kanye West's latest album came out, if iTunes had charged $1.00 per track I doubt if they would have sold significantly less copies. Conversely, is there any artist who would sell a lot *more* songs at 98 cents? Probably not. But is there an artist who could sell a lot more songs at 75 cents? Would the increased sales make up for the reduction in price? The answer to both questions might be yes. Is there an artist who might sell less songs at $1.25, but the increased revenue per sale would offset the lost sales vs. a $1.00 price? Quite possibly yes.
Simply put, there's an optimal price for any good. If demand elasticity is known(I explained it conceptually above, but it's something that can be numerically quantified for the purpose of performing calculations) then one can use calculus to easily determine the optimal price for a good. The optimal price is the price which yields the highest revenue. Anyone who's taken even basic calculus has probably done problems like this. You're given the formula, you make the calculation, and then put the result on a graph. Vertical axis is revenue, horizontal axis is price, and your result looks like a parabola in the shape of an upside down U, indicating there is an optimal price to sell the good at. Price it too high and you lose revnue, price it too low and you lose revenue.
Fairness doesn't matter, there's nothing special about the number 99. It's all about how to maximize revenue. My own gut feeling is that some songs are underpriced and others overpriced at 99 cents.