It seems to me, people are always getting into trouble trying the figure out the 'inherent' value of stuff when economics, eons ago, figured out that a good's worth depends on how valuable it is to people and how scarce it is.
This NPR story this morning about music pricing is another example of this phenomenon. Sure, the same music can sell for radically different prices, but the price itself tells you nothing about its value. Its value to a consumer is a function of that consumers tastes, income, ease of purchase, etc.
The music industry thrived on their ability to make music scarce but this ability is quickly diminishing and they are left to scramble to figure out a new model. But the music isn't less valuable now, it is just not as scarce. This is good news. We are all better off in this new world. The only losers are the few bands and performers that would have been superstars that can no longer corner a market. The rewards to being a good band are still there, just not as humongous.
Robert Frank coined the phenomenon of the huge rewards to the very top performers in markets were performance can be mass produced, 'winner-take-all-markets.' These markets produce a lot of contenders but few winners. I imagine a music industry in the future that has nearly as many contenders but many more winners, all with a modest reward.
Update: A reader points me to this New York Times 'Economic View' article by the aforementioned Bob Frank discussing the role of winner-take-all markets and other markets in the equity of progressive taxes.
Showing posts with label Winner-Take-All. Show all posts
Showing posts with label Winner-Take-All. Show all posts
Monday, April 27, 2009
Thursday, November 8, 2007
Economist's Notebook: Winner-Take-All Markets
One interesting graph that the OCPP produced regarding income inequality in Oregon that really caught my eye was this:
It caught my eye because of the title. Winner-Take-All (WTA) markets are one economic explanation for some of the income inequality we see in the current economy, especially at the very top. The OCPP uses the term in a negative way, but there is a very interesting economic theory behind the term.
The WTA market theory cannot explain all of the observed inequality, but it does go a long way to explain the increasing rewards to the very top of the income distribution, and it is very interesting. The story goes like this: in a modern economy where performance is easily recorded, duplicated, shared or otherwise increasingly impactful, the rewards to being the very best are dramatically higher than being second best. The recording industry is a good example. Before recorded music, musicians were travelling live performers. Being the best may have brought a few more people to each show, but overall the ability to leverage being the very best was small. With the advent of recorded music that was easily duplicated and distributed, being the very best suddenly meant potentially millions more records sold. Professional sports are another example, with increasing media coverage and distribution of live performances, the difference between the best performers in the MLB, say, versus the minor leagues has become humongous even though the difference in ability of a MLB player may be ever so slight relative to a AAA player. But this is not just an entertainment story. You can tell the similar stories with software programming, journalism, investment banking and even corporate leadership. These are all markets where the rewards at the top are hugely different then the rewards just below the top. In cases like CEO pay the theory says that while the difference between the best production line worker and the second best is a pretty small difference in corporate earnings, the difference between the best and second best CEO can mean tens of millions of dollars in corporate earnings. In software the theory says that the rewards grow as one product becomes the standard through something known as network externalities (think of the domination of Windows in the PC market). Finally, instances where there is reward by contest like in litigation can mean that the top litigators can reap most of the spoils.
So the key to WTA markets is the fact that though human capital differences may be small, the rewards are not. And, by the way, despite the title, there does not have to be a single winner in these markets, MLB players in general, top recording artists, top CEOs are all groups of people rewarded disproportionally to the difference in their skill relative to those just below them.
In the next post I take this theory to a local example in my favorite subject: Beeronomics
It caught my eye because of the title. Winner-Take-All (WTA) markets are one economic explanation for some of the income inequality we see in the current economy, especially at the very top. The OCPP uses the term in a negative way, but there is a very interesting economic theory behind the term.
The WTA market theory cannot explain all of the observed inequality, but it does go a long way to explain the increasing rewards to the very top of the income distribution, and it is very interesting. The story goes like this: in a modern economy where performance is easily recorded, duplicated, shared or otherwise increasingly impactful, the rewards to being the very best are dramatically higher than being second best. The recording industry is a good example. Before recorded music, musicians were travelling live performers. Being the best may have brought a few more people to each show, but overall the ability to leverage being the very best was small. With the advent of recorded music that was easily duplicated and distributed, being the very best suddenly meant potentially millions more records sold. Professional sports are another example, with increasing media coverage and distribution of live performances, the difference between the best performers in the MLB, say, versus the minor leagues has become humongous even though the difference in ability of a MLB player may be ever so slight relative to a AAA player. But this is not just an entertainment story. You can tell the similar stories with software programming, journalism, investment banking and even corporate leadership. These are all markets where the rewards at the top are hugely different then the rewards just below the top. In cases like CEO pay the theory says that while the difference between the best production line worker and the second best is a pretty small difference in corporate earnings, the difference between the best and second best CEO can mean tens of millions of dollars in corporate earnings. In software the theory says that the rewards grow as one product becomes the standard through something known as network externalities (think of the domination of Windows in the PC market). Finally, instances where there is reward by contest like in litigation can mean that the top litigators can reap most of the spoils.
So the key to WTA markets is the fact that though human capital differences may be small, the rewards are not. And, by the way, despite the title, there does not have to be a single winner in these markets, MLB players in general, top recording artists, top CEOs are all groups of people rewarded disproportionally to the difference in their skill relative to those just below them.
In the next post I take this theory to a local example in my favorite subject: Beeronomics
Beeronomics: What is John Harris Worth?
This here is John Harris - Brewmaster at Full Sail. John Harris is a master brewer - I mean master brewer. The trail of exceptional and iconic beers he has created, first at McMenamins, then at Deschutes and now at Full Sail is truly extraordinary. There are now many craft breweries in Oregon, most producing wonderful beer, but there are only a handful of truly exceptional beers being produced in Oregon and perhaps half are John Harris' creations. These are not only exceptional beers but also exceptionally popular.So the question is, what is John Harris worth? I mean this to be provocative, but think: now that the craft beer market is exceptionally crowded what is the potential difference in sales from having an almost great beer versus an exceptional beer? It is quite likely a few orders of magnitude. So if you were starting a new brewery as a purely business venture (I am aware and grateful that most breweries are started from other motivations) the difference between a good brewmaster and a great one can mean millions in sales. Like the post above, craft brewing in Oregon seems increasingly to be a winner-take-all market, where a few exceptional breweries get the majority of the shelf space, taps, and overall market share. Someone with John Harris' talents should make disproportionately more than most other brewmasters according to the theory. I don't think it has happened yet, but I would not be surprised to start seeing this in the future (especially as the macro brewers start to try and battle in the micro segment).
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