Deadweight Loss
You hear a lot of bogus statistics thrown around about economic losses due to piracy, but you hear very little about the economic cost associated with pricing digital media so far above the marginal cost of production.
For example, I was in Target last week and saw this box set of The OC DVDs on sale for $116.99:
Now for my part, I was never a huge OC devoté but I watched most of the first season and some of the second season before losing interest. And I have some money, I like pop culture, and I like impulse buys, etc. If this box set were orders of magnitude cheaper—say $10.00 instead of $116.99—I might have bought it. Now presumably the people running these businesses know what they’re doing, and overall profits really would be lower. But still, owning all those episodes would have given me $10.00 of utility and it would be possible, though not legal, for me to acquire them at no cost whatsoever to their owner. And it seems that The OC lost over five million viewers between its popular first season and its unpopular forth season. Maybe all five million of us would be moderately interested in the box set worth of DVDs were it cheap. That’s maybe $50 million—maybe more—in deadweight losses related to just one show.
Now obviously that’s a lousy estimate. Don’t take it seriously. Maybe some clever economist somewhere will come up with a reasonable way of calculating it. I’m just illustrating the point that the costs are real. And that for this reason, the optimal amount of copying is not zero. It’s just common sense that there are lots of people for whom owning the complete run of a TV show would be worth more than $0 but more than the $100+ prices these things carry in stores. It’s a good thing, from a social point of view, that some of those people are able to acquire “pirated” copies of the things they want to watch.
108 Responses to “Deadweight Loss”
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January 8th, 2009 at 8:30 am
Yes, Matt, but how much would you pay for a complete DVD set of The Wire?
January 8th, 2009 at 8:50 am
Generally the cost of replicating a DVD (that’s just replication, not authoring encoding or design) is about $0.80 per disc. The OCs complete series consists of 28 disc… that $22.40 in cost for the replication of all the physical discs. I’m not including the cost of authoring, encoding, designing, packaging, licenses, distribution, the actual cost of producing the series (which is done at a loss in it’s initial broadcast) and the residuals paid to the writer, directors, actors, producers, music performers, songwriters, plus in this case Target’s actual cut of the transaction… and that’s all before the copyright holder can see a profit. At $10 there is no way anyone would be able to make any money out of the deal…. granted 10 bucks is probably all the O.C’s complete series is worth.
January 8th, 2009 at 9:06 am
I suggest instead sending those 10 bucks to help spring “Sita Sings The Blues” out of copyright jail.
January 8th, 2009 at 9:09 am
The real absurdity is when they want to charge you more for a digital version of something over the internet than for a physical DVD.
(That’s the point I expected this post to make, rather than some bizarre assertion of the social benefits of downloading things you want for free.)
January 8th, 2009 at 9:13 am
Conversely, if you sold the box set at $10, you would be losing all of the potential profit from the customers who would be willing to pay $119. If a million customers are paying one tenth of what they’d be willing to pay, that’s a big loss for the company. I suspect that what they’re trying to do is maximize profit by selling at the highest price point first, then gradually lowering the price to lure in additional customers. That’s a perfectly reasonable strategy, akin to the way department stores price clothing. I think the producer is likely to make more profit that way, because each individual is paying close to the maximum that he or she is willing to pay.
January 8th, 2009 at 9:14 am
At $10 there is no way anyone would be able to make any money out of the deal
You may have a point about the physical cost of the media (though $0.80 seems high), but that’s not the point.
One could go on the internets and download it at essentially zero distribution cost. And it would provide somewhere between $1 and $100 worth of pleasure to each person who did. Since those downloads cost the produceer $0, but give all the downloaders utility, the downloading is a net social benefit.
If the producers sold it on iTunes for $10 (with zero marginal production cost), same thing. Though that way the network would end up owning some of that social benefit.
January 8th, 2009 at 9:22 am
The producers of the series are still contractually bound to pay some residuals when they distribute digitally at a profit… the cost while not huge is not $0… and the income generated assuming it’s 4 seasons at 24 episodes @ $10 is roughly 10cents per episode… not nearly enough to cover the residual fees… plus apple gets a 40% cut on iTunes sales. Digital pricing at $.99 per episode is about where it needs to be in order for the transaction to be worthwhile to content creators.
January 8th, 2009 at 9:23 am
I suspect that what they’re trying to do is maximize profit by selling at the highest price point first, then gradually lowering the price to lure in additional customers. That’s a perfectly reasonable strategy, akin to the way department stores price clothing. I think the producer is likely to make more profit that way, because each individual is paying close to the maximum that he or she is willing to pay.
Sure. They’re trying to maximize profits. But the question is whether allowing a monopoly producer to maximize profits indefinitely is leaving a lot of social benefit on the table.
January 8th, 2009 at 9:25 am
….Or wait a few months and find it at Half Price Books for $30.00
January 8th, 2009 at 9:27 am
The producers of the series are still contractually bound to pay some residuals when they distribute digitally at a profit… the cost while not huge is not $0… and the income generated assuming it’s 4 seasons at 24 episodes @ $10 is roughly 10cents per episode… not nearly enough to cover the residual fees… plus apple gets a 40% cut on iTunes sales. Digital pricing at $.99 per episode is about where it needs to be in order for the transaction to be worthwhile to content creators.
I think we’re taking “producers” here rather expansively, and would include people receiving residuals. The marginal distribution cost of online distribution is still (essentially) $0, and even a scaled down residual is better than nothing.
January 8th, 2009 at 9:32 am
I am stunned at the number of thieves among us.
January 8th, 2009 at 9:32 am
Matt, except that pricing at $10 is not going to keep at least some of the 5 million from ‘pirating’ anyway. So the firm trades 1m serious OC fans who will pay $100/unit (100MM) for, let’s say, 4m semi-fans x $10m ($40m) + 1m serious fans x $10 ($10m). i.e., give up $100m for $50m – not surprisingly the latter model doesn’t work (note the model doesn’t work even if neither the die-hards or semi-fans pirate. but to the extent they do, it is just more loss for the firm.)
Isn’t the new iTunes strategy – abandoning DRM but allowing the music companies to charge high prices for in-demand music – a version the same thing? In other words, if you care enough to get it right away, with no effort, and ‘legally,’ you’ll pay for that right. If you want to go to the trouble of getting the music from your buddy’s computer, go ahead. The music companies are essentially making you pay for the right to share the music.
January 8th, 2009 at 9:39 am
owning the complete run of a TV show would be worth more than $0 but more than the $100+ prices these things carry in stores.
*sigh* I guess it falls on my shoulders this time to point out that the second “more” should be a “less.” If nothing else, Yglesias is pretty amusing in how he doesn’t just spell things wrong, he sometimes uses the exact opposite word from what he means to use.
January 8th, 2009 at 9:45 am
Putting aside Matt’s specific example, he’s right as a general matter. Copyright is monopoly power. Monopoly power allows the monopolist to maximize its surplus at the expense of the consumer, reducing the total surplus. Thus, monopolies, generally speaking, are inefficient and therefore disfavored. Copyright is supposed to be a limited exception to the general policy against monopolies to encourage creation of content. At some point, the dead weight loss associated with monopolization outweighs whatever increase in utility results from creation of additional content.
One also wonders why conservatives who otherwise intepret constitutional grants of federal power in the narrowest way possible and/or purport to bind themselves to original intent have no problem with construing the words “for a limited time” out of the Constitution.
January 8th, 2009 at 9:55 am
Nicely caught, Adam, but you had a typo, which I fixed for you.
Remember, this is blogging, no editor. If you notice someone make an error in production of text, congratulate yourself, and point it out if necessary, but don’t think it’s because there’s something wrong with Matt. He’s providing the content. You’re just free-riding. HTH, HAND.
January 8th, 2009 at 10:15 am
A good portion of TV series DVD sales have got to be to rental outlets like Blockbuster, Netflix, and your local video store. Lower the price at Borders, and you’ve got to lower the price for those rental outlets as well. This was a problem in the VHS world as well — some movies would be $20, and others would cost $100+, because they knew that they could get it from the rental market.
January 8th, 2009 at 10:36 am
OT Technical note on piracy: Getting 28 DVDs of material via BitTorrent would take months—and the video quality would be substantially lower than on the original DVD.
I have to say that if I cared at all about owning every OC episode (which, as it happens, I do not), $116.99 seems a reasonable price for 92 hours of high-quality video.
January 8th, 2009 at 10:47 am
#17:
If you have a sufficiently high speed connection, and enough seeders, you could download that in a 3-4 days. And assuming the material was ripped from DVDs, it would be the same quality. You would be unlikely to be able to download the DVD add-ons (eg. deleted scenes, actor interviews, etc) that normally come with boxed DVD sets, though.
January 8th, 2009 at 10:48 am
Can someone explain this “social benefit” thing to me? Maybe I’m an ignorant boob, but it sounds like “other people exist to provide with with stuff”, an attitude that’s fine for a consumer but not when talking about economic and public policy.
Mike
January 8th, 2009 at 10:49 am
Uh, that is “other people exist to provide ME with stuff”.
Mike
January 8th, 2009 at 10:51 am
OT Technical note on piracy: Getting 28 DVDs of material via BitTorrent would take months—and the video quality would be substantially lower than on the original DVD.
Umm. This depends quite a bit on connection, I suppose, but months is a high upper estimate. A good cable or fiber connection could probably get you 4 seasons of a show in no more than a day or two at standard compression. Maybe a week or two for a bit-for-bit copy of the DVDs.
January 8th, 2009 at 10:56 am
Can someone explain this “social benefit” thing to me? Maybe I’m an ignorant boob, but it sounds like “other people exist to provide with with stuff”, an attitude that’s fine for a consumer but not when talking about economic and public policy.
Thismight get you started.
January 8th, 2009 at 11:01 am
This might be helpful too.
January 8th, 2009 at 11:21 am
Thanks, jack lecou. I think I get the concept of “social benefit” in economics now, though I think trying to apply it to the price of OC dvd’s is stretching it to the point of incomprehensibility.
Mike
January 8th, 2009 at 11:29 am
trying to apply it to the price of OC dvd’s is stretching it to the point of incomprehensibility.
It seems like a pretty straightforward application, really. Or at least as straightforward as these things ever get in real life.
January 8th, 2009 at 11:31 am
This business about copyright as monopoly power is nonsense. Yes, a copyright holder has (theoretically) sole distribution power over a given work, but that’s no more a monopoly than I become a monopoly landowner because only I get to say who can come into my apartment. There’s plenty of competing producers of movies, TV, and music, so throwing around the word “monopoly” is nothing but a cheap scare tactic.
As for the assertion “Online distro costs nothing, so you should give things away online”: Distribution costs were tiny to the point of nonexistent long before the internet. What costs money is production—actors, sets, costumes, cameras, editors, light kits, makeup artists, etc., etc. None of that is affected by your means of distribution. And all those involve real costs which you wouldn’t be able to make up if you sold 92 hours of programming for $10.
As for social benefit: It’s sort of ridiculous to calculate social benefit purely as “I want to see these shows for free, so if I could, that would be totally beneficial”. If you’re going to calculate social benefit, you need to take into account the harm done to the various artists and production professionals who will see their small residuals turn into no residuals, and the decimation of the production industry that results when people don’t pay for the shit they consume.
January 8th, 2009 at 11:51 am
Yes, a copyright holder has (theoretically) sole distribution power over a given work, but that’s no more a monopoly than I become a monopoly landowner because only I get to say who can come into my apartment. There’s plenty of competing producers of movies, TV, and music, so throwing around the word “monopoly” is nothing but a cheap scare tactic.
No. It is, actually, a monopoly. Granted by copyright. There are of course markets of ‘monopolistic competition’ within the various entertainment sectors, but there are still monopolies here.
As for the assertion “Online distro costs nothing, so you should give things away online”
I see no one making this assertion.
If you’re going to calculate social benefit, you need to take into account the harm done to the various artists and production professionals who will see their small residuals turn into no residuals, and the decimation of the production industry that results when people don’t pay for the shit they consume.
Yes, you’re absolutely. And this is the tricky part. But that’s the whole point – copyright law is supposed to be a balancing act. It’s necessary to offer incentives to producers to create works, but the ultimate point is to benefit society, by getting them into the hands of listeners and readers and viewers. We want as many works as possible, but also we want to disseminate those works as widely as possible.
This is not served when content producers get to claim that every download somehow costs society full retail price.
January 8th, 2009 at 12:11 pm
Don’t overlook the opportunity cost of this kind of whim purchase.
And really, no matter what you paid, how many times are you going to watch a TV series? Based on my experience (and I do not buy these kinds of products anymore) of buying one or two seasons of Oz and BSG, the answer for me was “once.” Fortunately I was able to sell these at a small loss, but I have to look back on what those purchases, if invested, would be worth now. Obviously we’re talking around $100 or so, but it all adds up, and my life is no brighter for having spend the time and money on them.
Yeah, that’s me, Mr Buzzkill.
January 8th, 2009 at 12:28 pm
Are you kidding me? I would wayy pay $116.99 for the whole OC pack. Sure the fourth season sucked, but OC is AWESOME!!!
January 8th, 2009 at 12:30 pm
“As for social benefit: It’s sort of ridiculous to calculate social benefit purely as “I want to see these shows for free, so if I could, that would be totally beneficial”.”
This is what I tried to get at.
Mike
January 8th, 2009 at 12:32 pm
One also wonders why conservatives who otherwise intepret constitutional grants of federal power in the narrowest way possible and/or purport to bind themselves to original intent have no problem with construing the words “for a limited time” out of the Constitution.
You really can’t blame that on “conservatives”. The Democrats are just as bad or worse about protecting the entertainment industry. I believe Yglesias and Atrios have made this point several times.
January 8th, 2009 at 12:35 pm
Jack Lecou – No, that’s not a monopoly. That’s not what the word means, and economists don’t apply the concept in situations like this – ie, that every single product made anywhere, ever, is, ipso facto, a monopoly because nobody else can make an identical product. That would render the word utterly meaningless.
I could go on, but really, all that needs to be said is, that’s not what the word means.
January 8th, 2009 at 12:37 pm
How is this any different from saying… “It’s just common sense that there are lots of people for whom owning a Van Gogh painting would be worth more than $0 but more than the $100 million prices these things carry in stores?” Also, this isn’t a monopoly unless you’re suggesting Coke-Cola has a monopoly on Coke-Cola products, in which case you completely take away what’s wrong with monopolies.
January 8th, 2009 at 12:40 pm
I think the high price strategy is not the best way to extract money from consumers, at least from me. When I was living in Indonesia the only DVD’s available in my area were pirated copies but you could buy them for about $1.00 each or less if you bought a dozen or more. I am sure I spent a lot more on movies there than I do now. I watched more movies too, and got interested in buying all the movies of certain actors and directors. Back in the states I am picky about what I rent and never spend $10 at a shot.
January 8th, 2009 at 12:41 pm
“As for social benefit: It’s sort of ridiculous to calculate social benefit purely as “I want to see these shows for free, so if I could, that would be totally beneficial”.”
This is what I tried to get at.
But no one is calculating benefit that way. It is indisputably true that IF an additional say, 1 million people, can watch the show (without significantly affecting the production of new works), it is a large social benefit, and completely independent of how much money is transferred to the entertainment industry.
That has nothing all to do with wanting to watch something for free.
January 8th, 2009 at 12:43 pm
What you are saying is that if something is to expensive you should just steal it. That’s crazy.
January 8th, 2009 at 12:46 pm
Jack Lecou – No, that’s not a monopoly. That’s not what the word means, and economists don’t apply the concept in situations like this – ie, that every single product made anywhere, ever, is, ipso facto, a monopoly because nobody else can make an identical product. That would render the word utterly meaningless.
Well, that is in fact what the word means. Largely because of trademark law, most consumer products technically exist in markets of “monopolistic competition”. Coke vs. Pepsi. Nike vs. Adidas. Etc. The only real exceptions are commodities like flour or bacon.
And I’d also point out that the substitutability between ‘OC’ and, say, “Sex in the City” or something, is probably rather less perfect than between Coke and Pepsi.
January 8th, 2009 at 12:47 pm
What you are saying is that if something is to expensive you should just steal it.
Nope. Try reading it again. Maybe start with a primer on copyright first.
January 8th, 2009 at 12:48 pm
Sign up for a Netflix free trial and watch them all for nothing. Sometimes shoppers aren’t very smart.
January 8th, 2009 at 1:10 pm
No, it’s not a monopoly, Jack. A monopoly, for one thing, can have no real alternatives. You’d have a very, very hard time convincing anybody that there are no alternatives to watching The OC.
January 8th, 2009 at 1:13 pm
Besides, I think think Matt’s point was not that the the makers of The OC harm the public good by charging too much (it was impossible to type those words without giggling), but that they’re foolishly minimizing their potential profits by charging too much. Those are different accusations.
January 8th, 2009 at 1:16 pm
No, it’s not a monopoly, Jack. A monopoly, for one thing, can have no real alternatives. You’d have a very, very hard time convincing anybody that there are no alternatives to watching The OC.
It depends on where you draw the line for the market. If you draw it wide enough, there are alternatives, sure. Other shows. Movies. Even reading a book or going to the art museum.
But that’s not the same as a real substitute. The ‘OC’ is unique, and its producer has a monopoly on its production and a (de jure) monopoly on its reproduction.
January 8th, 2009 at 1:18 pm
Also, pure monopolies cannot price discriminate, yet The OC seasons 1-4 is available on Amazon.com for $89.89.
http://www.amazon.com/gp/offer-listing/B000NJXG6S/ref=dp_olp_new?ie=UTF8&condition=new
January 8th, 2009 at 1:19 pm
Jack, I get the idea that The OC is The OC and not 24. I understand that – it’s “unique” as a particular trademark. Every trademark and is a unique trademark. What I’m saying is that trademarks are not monopolies, and your use of the word is incorrect. It’s clear you don’t understand that, but it’s true nonetheless.
January 8th, 2009 at 1:27 pm
Also, pure monopolies cannot price discriminate, yet The OC seasons 1-4 is available on Amazon.com for $89.89.
The existence of price discrimination doesn’t neccessarily mean there isn’t a monopoly. It just means there’s somewhat less social deadweight loss. (Price discrimination essentially means there’s more than one market, but the a monopoly firm will still be a monopolistic price setter in each of the segmented markets.)
January 8th, 2009 at 1:29 pm
Yes it does, Jack. Price discrimination within by a supposed monopoly is functionally equivalent to having a competitor. Again, what I’m telling you is not what Bosch’s Poodle’s opinion is, but how the words are defined. They are what they are, and they’re not what you say they are.
January 8th, 2009 at 1:29 pm
Jack, I get the idea that The OC is The OC and not 24. I understand that – it’s “unique” as a particular trademark. Every trademark and is a unique trademark. What I’m saying is that trademarks are not monopolies, and your use of the word is incorrect. It’s clear you don’t understand that, but it’s true nonetheless.
If you draw the line wide enough, sure. But for someone who wants to watch the second season of ‘OC’, not ‘24′, there is only one firm they can buy it from. Even for ‘OC’, this is a non-zero sized market, and ‘OC’ is a monopoly.
January 8th, 2009 at 1:32 pm
True, but that’s not where any actual economists draw the line.
January 8th, 2009 at 1:33 pm
In the vernacular, a monopoly doesn’t have such a strict definition, but in the sense we’re discussing it, it does. It refers to categories of goods, not trademarks (of course, in real monopolies vs. pretend monopolies, the category of good is also a trademark).
January 8th, 2009 at 1:35 pm
Wikipedia, which is of course infallible: There are important points for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lower, than a competitive firm follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in price discrimination (this is called first degree price discrimination, where all customers are charted the same amount). If the monopoly were permitted to charge individualized prices (this is called third degree price discrimination), the quantity produced, and the price charged to the marginal customer, would be identical to a competitive firm, thus eliminating the deadweight loss…
January 8th, 2009 at 1:36 pm
Price discrimination within by a supposed monopoly is functionally equivalent to having a competitor.
No, it’s still a very different situation. Even if there’s perfect price discrimination. While that would be equivalent from a total social welfare perspective, you could still tell it’s a monopoly because there’d be 0% consumer surplus and 100% producer surplus. Which would be odd for a competitive market.
January 8th, 2009 at 1:43 pm
Jack – You are correct that the benefits of trade would go to the producer, so I was incorrect in saying they’re functionally equivalent. But my point is that the producers of The OC price-discriminate to a significant degree which suggests they’re not monopolists.
January 8th, 2009 at 1:45 pm
It refers to categories of goods, not trademarks
Right. And your assertion is that the relevant category of goods can’t possibly be more fine grained than “tv shows” or “entertainment goods”. But that seems to me to gloss over the preferences of a lot of consumers who would disagree.
Certainly I wouldn’t say that ‘OC’ actually has perfect price-setting ability, but there’s definitely some monopoly power there.
January 8th, 2009 at 1:46 pm
But my point is that the producers of The OC price-discriminate to a significant degree which suggests they’re not monopolists.
I don’t see how that follows. They price discriminate because the structure of the market allows them to. All monopoly producers would like to price discriminate if they could. That doesn’t make them not monopolies.
January 8th, 2009 at 1:47 pm
I don’t think that’s very expensive for the full series. It’s less than $30 per season, which is pretty similar to other shows.
Can someone explain why “it’s a good thing, from a social point of view” for people to “aquire” pirated tv shows? I see why it’s good for the person doing it, but why is it good for anybody else?
January 8th, 2009 at 1:48 pm
And, again, my point is that every brand always has some people who prefer it over other brands. So if you apply “monopoly” to every single thing for which somebody somewhere has a preference they will pay for, then the word has no meaning.
January 8th, 2009 at 1:49 pm
too many steves: All it means is that those people believe they have gained some benefit from having the DVDs – ie, they enjoyed watching them.
January 8th, 2009 at 1:50 pm
Jack – But the thing is, it does mean they’re not monopolists, because monopolists won’t do that.
January 8th, 2009 at 1:53 pm
Can someone explain why “it’s a good thing, from a social point of view” for people to “aquire” pirated tv shows? I see why it’s good for the person doing it, but why is it good for anybody else?
It’s not good for anyone else. But as long as it’s not actually (much) worse for anyone else, the sum of the benefits of everyone in society goes up.
For example, if ’society’ consists of Jack, Jill, Alice and Abe, and each currently get 20 units of enjoyment from life, net social benefit is 80 units. But if Alice can download a tv series and gain a unit, without hurting the others, net social benefit increases to 81.
(And net social benefit still increases even if it costs the others a small amount. E.g., if Alice’s action costs them 0.1 units each, net benefit still goes up 0.7 units.)
January 8th, 2009 at 1:54 pm
Jack – But the thing is, it does mean they’re not monopolists, because monopolists won’t do that.
Why ever not?
January 8th, 2009 at 2:00 pm
You could look it up. It involves math.
January 8th, 2009 at 2:10 pm
And, again, my point is that every brand always has some people who prefer it over other brands. So if you apply “monopoly” to every single thing for which somebody somewhere has a preference they will pay for, then the word has no meaning.
A monopoly is not some platonic ideal. There are degrees of monopoly power depending on the degree of substitutability. And yes, branded products are more monopolistic than commodities. In the soda market, I don’t think the degree is large enough to cause any harm. In the entertainment market I’m not so sure. If you think that makes the term meaningless, fine.
January 8th, 2009 at 2:11 pm
It looks to me like a monopolist would very much like to perfectly price discriminate. That would increase social benefit to the non-monopoly level, and they get to keep all the gain. Usually it’s not possible to discriminate that much, but they’d certainly do it if they could.
Something wrong with that?
January 8th, 2009 at 2:13 pm
So you are on record as believing that The OC has sufficient market power and prestige as to cross the line and amount to essentially a monopoly because it cannot be substituted with Aisha. Got it.
January 8th, 2009 at 2:18 pm
So you are on record as believing that The OC has sufficient market power and prestige as to cross the line and amount to essentially a monopoly because it cannot be substituted with Aisha. Got it.
There’s no ‘line’ per se. But yeah, I think the copyright restrictions on ‘OC’ may be restrictive enough that they are leaving some social benefit on the table.
January 8th, 2009 at 2:19 pm
And yes, branded products are more monopolistic than commodities. In the soda market, I don’t think the degree is large enough to cause any harm. In the entertainment market I’m not so sure.
So, Jack, are you suggesting that the difference between “entertainment products” correlates meaningfully with the difference between Coke and Pepsi? Because if you aren’t, I don’t see what you’re driving at; if you are, I disagree strongly.
As for your comment at #61: if Alice downloads a TV series for free instead of buying it on DVD, there’s a loss of revenue to the producers of said TV series that you blithely ignore. And that revenue, or absence thereof, seems to me to be what this entire discussion is about.
January 8th, 2009 at 2:21 pm
And while I was composing my comment, Bosch’s Poodle said it better with the OC/Aisha analogy.
January 8th, 2009 at 2:30 pm
So, Jack, are you suggesting that the difference between “entertainment products” correlates meaningfully with the difference between Coke and Pepsi? Because if you aren’t, I don’t see what you’re driving at; if you are, I disagree strongly.
Huh? I don’t have any idea what this question is asking. If it helps, I think the difference between the markets is that while there’re probably several pretty acceptable subsitutes for a can of Coca Cola (Pepsi, generic, whatever), the substitutes for episode #15 of ‘OC’ are far less close. I imagine especially so if you’ve already watched #s 1-14.
As for your comment at #61: if Alice downloads a TV series for free instead of buying it on DVD, there’s a loss of revenue to the producers of said TV series that you blithely ignore. And that revenue, or absence thereof, seems to me to be what this entire discussion is about.
What loss of revenue? You’re assuming the choice is between “Alice buying it” and “Alice downloading it for free”. And while RIAA, MPAA, et al. love you for that, there’s no basis for the assumption.
The actual choice here is between ‘Alice downloading it’ and ‘Alice not enjoying herself quite as much’. The former has an unambiguously higher net social utility.
January 8th, 2009 at 2:45 pm
(Still waiting for an explanation of how ‘math’ shows that a monopolist would somehow prefer NOT to price discriminate when he can…)
January 8th, 2009 at 2:52 pm
But for someone who wants to watch the second season of ‘OC’, not ‘24′, there is only one firm they can buy it from. Even for ‘OC’, this is a non-zero sized market, and ‘OC’ is a monopoly.
No—they can buy it from Best Buy, Amazon, iTunes or any one of many, many retailers. You could say that those retailers can only buy it from the production company, and therefore it’s a monopoly, but that’s like saying that Radiohead is a monopoly because only Radiohead can provide Radiohead songs.
What loss of revenue? You’re assuming the choice is between “Alice buying it” and “Alice downloading it for free”. And while RIAA, MPAA, et al. love you for that, there’s no basis for the assumption.
The actual choice here is between ‘Alice downloading it’ and ‘Alice not enjoying herself quite as much’. The former has an unambiguously higher net social utility.
No, that’s not the choice at all. The choice is between:
1) Alice watches the show without paying the content producer
2) Alice pays the content producer some amount for the show (usually through a middleman in the form of a retailer)
3) Alice doesn’t watch the show
Alice might think that #1 has the highest social utility, and certainly it has the highest utility to her in the short term. But in the long term, it means that shows can’t be produced, and therefore Alice will not have any more shows to watch. #3 is unfortunate for Alice, but much better, from a social utility perspective, than #1, since most people would rather shows continue to exist than that Alice be able to see shows made in the Before-Time for free. #2 seems the best compromise between those positions.
One of the many delights of the modern era has been artistic production ceasing to be the domain of artistocrats and their patrons, and becoming a business where even the very poor can become rich, or at least less poor. This has led to an explosion of creativity and availability, as many people who would otherwise be working in coal mines grab at their chance. Hence, for example, The Beatles, who were so desperate to get the hell out of Liverpool that they had a business manager before they had a steady drummer.
In the absence of that, there will certainly still be some art made by hobbyists, and some production through grants and universities (that is, aristocratic patronage). But it will be limited, and far fewer people will be willing to put in the effort and time it takes to go from talented to great; as Ol’ Dirty Bastard said, “Who the fuck wanna be an MC if you can’t get paid to be an MC?”
January 8th, 2009 at 2:52 pm
Conversely, if you sold the box set at $10, you would be losing all of the potential profit from the customers who would be willing to pay $119.
I’m inclined to agree with this. There are several routes for someone wanting to watch the entire run of The OC — cable syndication, rental, etc. — and those kinds of boxed sets are luxury impulse buys — or birthday/Christmas gifts, so there’s a luxury premium priced in. Further, if the boxed set cost $10, then that in turn squeezes the value of syndication and rental. And in strictly environmental turns, it seems really fucking wasteful to encourage the purchase of 28-disc boxed sets for something that was basically fluff television.
It’s just common sense that there are lots of people for whom owning the complete run of a TV show would be worth more than $0 but more than the $100+ prices these things carry in stores.
I think there’s a generational shift on display: Matt’s of that age and tech experience where he’s inclined to believe that it’s up to the rights-holders to bargain him up from $0. I don’t think that holds.
January 8th, 2009 at 3:01 pm
No—they can buy it from Best Buy, Amazon, iTunes or any one of many, many retailers. You could say that those retailers can only buy it from the production company, and therefore it’s a monopoly, but that’s like saying that Radiohead is a monopoly because only Radiohead can provide Radiohead songs.
Right. These entertainment products are sold through various retailers and distribution channels. And yes. Radiohead (or their label) has a monopoly on the distribution of Radiohead songs in exactly the same way that Fox does ‘OC’.
No, that’s not the choice at all. The choice is between:
1) Alice watches the show without paying the content producer
2) Alice pays the content producer some amount for the show (usually through a middleman in the form of a retailer)
3) Alice doesn’t watch the show
This is silly. In both Matt’s and my example, it is plain that choice #2 simply does not exist. Alice is unable or unwilling to buy it at the price it is offered.
That leaves only #1 or #3. And ceteris paribus, #1 has unambiguously greater net social utility.
January 8th, 2009 at 3:15 pm
Or to put it another way, suppose that Fox is able to sell 100 copies of ‘OC’ at $100 each.
Now suppose we can somehow segment the market, so that the 100 people who are willing to buy it continue to do so, but to everyone else, we give it away free. IF we could do this, it would produce far greater social utility. (In fact, while I’d have to do the math, it’s possible that this might maximize it.)
January 8th, 2009 at 3:22 pm
well, $10 is obviously way too low, but that $.80 per DVD replication figure in the first comment can’t be right either. a 28-disc full run of a 4 season series, I’d say somewhere $40-50. there can’t be many people in this economic climate who are going to shell out over $100 for the OC. most people obsessed enough to want such a thing have already shelled out about that much aggregate by purchasing the individual seasons on DVD already.
January 8th, 2009 at 3:22 pm
It should be noted that copyright is not merely a monopoly, but that it amounts to a ruinously vast subsidy.
January 8th, 2009 at 3:26 pm
I have to agree with Jack. For comparison, look at non-copyrighted works of art. One company has 100% of the OC market, while there is plenty of competition in the Hamlet or Leaves Of Grass markets.
In theory, you could see several different productions of Hamlet in a short period of times that are competing directly with each other. And the whole time you could be checking it against the original text on one of several iPhone apps.
A copyright is a government granted monopoly, clear and simple.
January 8th, 2009 at 3:27 pm
One thing we really should be able to get over int the current environment is this silly magical thinking: ‘Gee, these decisions are made by smart people with MBAs from famous schools who drive really, really, expensive cars, so they must be the right choices.” The reason we’re in the mess we’re in today is that those smart people made decisions that not only screwed over the rest of us, they screwed their own companies too, and often themselves. And remember, the guy who as President made this gigantic clusterfuck work has a Harvard MBA.
When DVDs first came out, they were routinely priced at $60 – $100 for single movies and sold largely to rentals stores, on the assumption that there wasn’t a real market for home ownership of DVDs. This theory proved wrong. TV box sets are currently priced as luxury goods on the theory that the limited market for them at that pricing compensates for losing the much larger market of selling them at affordable rates. Yet they seem to be fairly popular for rentals at Blockbuster & Netflix, even though this involves the added expense and inconvenience of 5 or 6 distinct rental transactions. It’s quite likely that the studios are leaving money on the table and pricing at a point that is not only sub-optimal for society, but sub-optimal for themselves.
January 8th, 2009 at 4:02 pm
Alex F: oh, I’ll absolutely grant you the sticking power of price points, which kept the music CD hovering around $15 (or £15) for years. The curious psychology here is that $40 for each single-season DVD set feels like more of a rip-off than $100 for the 4-season set.
January 8th, 2009 at 4:06 pm
So, according to Jack and Mac, everything produced by any company under any brand name, at any time, anywhere, is a monopoly. In other words, virtually all economic activity takes place between consumers and monopolists.
This is a silly semantic argument. You both surely understand that the word “monopoly” isn’t used that way by serious people, and if it were, the word would have no meaning. Don’t you?
I guess that makes me a monopsonist! When I buy a can of Tab (which is, of course, a monopoly!), that means no other consumer can buy that particular can of tab! That makes me a monopsonist!
All consumers are monopsonists, and all producers are monopolists. Riiiight. And this advances our understanding of economics how?
January 8th, 2009 at 4:08 pm
All consumers are monopsonists, and all producers are monopolists. Riiiight. And this advances our understanding of economics how?
Your simplistic misinterpretation? Not a whit.
January 8th, 2009 at 4:17 pm
P.S.: You might want to look at this.
January 8th, 2009 at 4:37 pm
Jack, my point, which has not been subtle, is that economists do not categorically declare things like brands and individual TV shows as monopolies. Obviously if I record myself farting into a tuba, the only place you’d be able to buy that tape is from me, and you could call that a ‘monopoly.’ But people who do this stuff for a living would not. That’s all I’m saying. It’s honestly not very complicated.
You are confusing your colloquial usage (a specific brand or product that is produced by a specific company) with the actual meaning (a category of good with no reasonable substitutes). Under your incorrect, false, wrong, and resolutely ignorant misuage of the term, any difference at all between any product results in a new “monopoly.” That’s absurd and you know it.
January 8th, 2009 at 4:38 pm
Copyright does not apply to an industry as a whole – such as the “music industry” or the “movie industry”. It is about the protection of rights for the people involved in producing a single product – a song, a television series, a movie, a book, etc.
Saying that copyright creates monopolistic competition is not a valid argument against copyright. For example, that significant number of the people selling and purchasing them believe songs are all worth about $1, depending on popularity for any differences, is what defines monopolistic competition.
Copyright may be “government granted monopoly” for that single product. But the purpose is to protect the rights of the person, group or organization that produces that product. They deserve the same respect for their product as anyone else. That they price their product foolishly to help pay some of their employees ridiculous wages is not a indictment of copyright.
January 8th, 2009 at 4:40 pm
Under your incorrect, false, wrong, and resolutely ignorant misuage of the term, any difference at all between any product results in a new “monopoly.” That’s absurd and you know it.
That’s not my usage of the term, not exactly anyway.
I said earlier that the idea of monopoly was not some platonic ideal. In fact, it’s perfect competition that is the platonic ideal. And whenever a single producer is able to wield substantial (or at least noticeable) market power, we call it monopoly (or say that the firm has some monopoly power). (If it’s more than one firm, collectively wielding the power, it’s oligopoly.)
It’s not necessary to be the only seller of oxygen on a space station to have a monopoly. You can wield monopoly power even when alternatives to your product exist. They just have to be slightly weak alternatives. Television shows certainly qualify.
January 8th, 2009 at 4:42 pm
Perfect competition in the ‘OC’ dvd market would involve thousands of sellers selling identical dvds. That certainly doesn’t appear to be the case. At least not lawfully. QED.
January 8th, 2009 at 4:43 pm
Saying that copyright creates monopolistic competition is not a valid argument against copyright.
It certainly isn’t. It’s a good thing, then, that nobody here is using it as one.
January 8th, 2009 at 4:44 pm
But the purpose is to protect the rights of the person, group or organization that produces that product.
Protecting the exclusive copy rights of the producer is only a means to an end. The purpose of copy right is to provide financial incentives to produce creative work – so that it can be enjoyed by the public.
January 8th, 2009 at 4:46 pm
Jack Lecou seems to be the only commenter here who understands basic economics and economic concepts. He’s right about the economic concept of “social benefit,” he’s right about monopolies, etc. Nice going, Jack.
(If it matters, I have a PhD in economics from one of the top programs.)
Economic theory has many problems, perhaps, but you have to understand it before you can talk about it. I would suggest that a little more humility by the other commenters would be in order.
January 8th, 2009 at 4:56 pm
Jack – Exactly. As I suppose we both have said already, the question is one of degree, and you’re cutting it ridiculously close to calling virtually every producer a monopolist. Obviously we’re not talking about table salt, but individual brands with highly diverse markets (as in the market for television entertainment) are not monopolies. If you’re talking about everything that’s not a perfect commodity (monopolistic competition) then the producers can exercise a small degree of price control, and we’re into shades of grade. But if the world is to be divided into monopoly/not-a-monopoly, the path you went down, The OC falls into the latter category.
Ed – Argument from authority does not, actually, matter, but good for you.
January 8th, 2009 at 5:01 pm
But if the world is to be divided into monopoly/not-a-monopoly, the path you went down, The OC falls into the latter category.
I don’t believe I ever went down such a path.
My point is, and continues to be, that copyright monopoly gives television show producers non-negligible market power, and I am, like Matt, concerned about the potential welfare effects and interested in possible alternative public policies.
January 8th, 2009 at 5:02 pm
I’m generally a pirate, but I bought the first season of Terminator DVD even though I not only had the downloaded versions, I also had them all backed up on DVD and CD.
I bought the DVD because I wanted to see the extras, including Summer Glau’s rehearsal for her ballet number in episode 7, as well as having a good quality version for more backup.
I’ve never bought but one Corrs CD – and that one was on sale for $10 – but I have bought three of their DVDs because it was the best and quickest way to get their video concerts complete and in good quality.
Again, all this means is that people are paying for easy ACCESS to content – not the content itself.
“But the purpose is to protect the rights of the person, group or organization that produces that product.”
No, it is not, most definitely. It has absolutely ZERO to do with “rights” for producers. IP laws have one (allegedly) valid purpose and that is to stimulate production by allowing monopoly profit for a limited time. No evidence has ever been produced that proves that such laws actually work to produce more product than would have been produced without them.
But the notion that people have a “right” to produce a product without anyone else copying or other forms of unauthorized distribution is just bogus. Like all so-called “rights”, this is a matter of social compact without any rational logic behind it at all. What matters is the economic effect of such compacts. And the effect of IP laws is negative in all cases.
Matt is probably wrong when he says you could sell 92 hours of a show on a physical medium for $10. I don’t know the production cost of that box of DVDs but it’s probably higher than $10. However, there’s little doubt that you COULD sell those 92 hours online for $10 or even less. The fact that download speeds do not easily allow for downloading that much material within a reasonable time is merely the effect of poor management on the part of the telcos, and has nothing to do with the feasibility of selling the stuff online for lower cost to many more people than are willing to pay for the physical media. When download speeds in the US match those in South Korea or Japan, selling those 92 hours online will be cheaper and more profitable than selling DVDs.
And so will downloading using file sharing methods – except that it will still be easier to get an official copy than a pirate copy due to the issues of management of the process. Using a P2P system is a royal PITA compared to buying from an official source and that isn’t likely to change.
The rule of thumb in retail is that halving the cost increases the market by a factor of four, until it’s free and everyone wants one whether they need it or not. This applies to online vs physical as well.
January 8th, 2009 at 5:08 pm
(And, as a pointlessly argumentative point of fact, neither the–useful–concept of monopolistic competition, nor the use of the word ‘monopoly’ in reference to the way in which brands like Bounty and Charmin are monopolies render the term ‘meaningless’.)
January 8th, 2009 at 5:14 pm
We’re getting closer to agreement then. The power is non-negligible, perhaps, but awfully close.
Someone smarter than me (maybe Ed) should explain why the contract theory of copyright is bad, as I’ve endlessly been told it is. If I produce something that can be copied, and I sell it to people on condition they contract with me never to copy it for others, then effectively, that’s a copyright, and I’m still a ‘monopolist’ for that product, right? I’ve never understood why that doesn’t or couldn’t work. I guess that’s what’s in the EULAs I’m always clicking on, but is that a logistical problem (too hard to enforce) or a theoretical problem (as I’ve been told it is).
January 8th, 2009 at 5:15 pm
Hack: ‘I’m generally a pirate…’
Understatement of the year.
January 8th, 2009 at 5:43 pm
We’re getting closer to agreement then. The power is non-negligible, perhaps, but awfully close.
Perhaps. Obviously the degree of market distortion involved is a quantitative matter. I guess I’d estimate it’s more than you think, but we’re obviously both just speculating. (For support, look at some of the comments above about the weird pricing schemes Big Content has gone through. I think a competitive market would have adapted much faster. For comparison, look at the market for the devices you play this stuff on…) (And yeah, I’m aware that these pricing schemes are more a function of the oligopolistic nature of the big content producers rather than evidence of monopolies for individual shows, but still.)
Someone smarter than me (maybe Ed) should explain why the contract theory of copyright is bad, as I’ve endlessly been told it is. If I produce something that can be copied, and I sell it to people on condition they contract with me never to copy it for others, then effectively, that’s a copyright, and I’m still a ‘monopolist’ for that product, right? I’ve never understood why that doesn’t or couldn’t work. I guess that’s what’s in the EULAs I’m always clicking on, but is that a logistical problem (too hard to enforce) or a theoretical problem (as I’ve been told it is).
Huh. Yeah, as a practical matter, I can certainly see how it’s weak (you’d only have recourse against the people you actually contract with – if you find a copy on the internet, the cat would be out of the bag, even if you could trace it back and sue the leaker, you can’t stop it.) At the very least, wide distribution that way would be impossible, if not impossible.
On a strictly theoretical level, where we ignore the costs of all the extra legalese, and assume everyone obeys the contract, I’m not sure I see any difference either. Although I guess the other tricky part for a creator might be restricting derivative works, and for the public, ensuring limited terms.
I’m sort of with Mr. Steven Hack, favoring, if not a complete dismantling, than a dramatic scaling back of the copyright privilege. (Or, at the very least, tailoring the protection to individual markets or media, so books and films and music and tv shows could all have only as much as was necessary.) I’m not aware of any fundamental theoretical problems with that (not ones I credit anyway), so in that light I’m not sure how I there could be any with the above either.
January 8th, 2009 at 6:07 pm
I guess I’d estimate it’s more than you think, but we’re obviously both just speculating.
Actually, I’m probably making this too hard. For support, just look at the stand in the market in Bangkok or wherever, where you can buy 12 DVDs for a buck. That’s a competitive market.
Yes, I’m aware that those prices reflect only marginal costs, failing to account for the fixed cost of making the content in the first place, but that’s the whole point: Prices in markets for easily reproducible content where the prices are based on average production costs are much higher. But they couldn’t be higher without (government granted) monopoly power.
And the price difference between Bangkok and Amazon.com is obviously pretty substantial.
January 8th, 2009 at 6:25 pm
(BTW, ed, thanks. I’m usually pretty sure I’m more or less right, and not crazy, but it’s nice to hear.)
January 8th, 2009 at 7:55 pm
Retail price to non-bulk purchasers is $0.28. The cases, however, cost more.
I’m not kidding. Cases for DVDs cost more than the disks.
January 8th, 2009 at 7:59 pm
The point of charging the outrageous initial price is that the rent on a 4″x6″ piece of shelf in a store is fairly low. You can charge $10 a year from now.
January 9th, 2009 at 1:30 am
Thank you.
January 9th, 2009 at 2:56 am
Well the copyright on the show has no motivational benefit at all. They already produced the show and broadcast it away for free.
The copyright, at this point, exists solely to create royalties for people whose creativity dried up long ago. It’s a deadweight loss because their output is no longer worth the cost of Scion and Axe body spray commercials.
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