Here we go social sciences fans, another opportunity for me to apply my studies to my views on the world. As you will have read, I have chosen economics as my specialist subject. So far in the module, I have looked at industrial revolution, and the questions of whether we are living through a new one, or whether the process has been continuous. That is a point to which I will return. Since that entry I have read refined points on industry life cycle, entry and exit costs (to any given market/industry/business), and shakedown (the process whereby inefficient firms or those not innovative drop out). I have just finished reading about strategic competition, collusion, and price taking, and this most recent study will be the thrust of this entry.
How, then , can I apply this to my personal view on the world? In this case I have decided to look at the music scene in Glasgow, which has been in Renaissance for the last decade, having suffered from the demoralising effects of a practice known as 'Pay to Play'. In a nutshell, this policy meant musicians had to ensure a certain amount of ticket sales at their gigs, in order to avoid being out of pocket. The practice was extended by some venues by tying musicians into a deal which meant hiring the PA system and sound engineer belonging to the venue. These factors (amongst others) did a lot of damage to the music scene in Glasgow, causing many musicians, to use a local parlance, to feel scunnered.
Now, with the scene set, here's the (social) science bit. Since my last entry Long Live the (Industrial) Revolution, Feb 2012, I have been studying cost curves, which look at various factors of production of a firm, or group of firms (industry/market), such as production costs, supply, demand and price. These factors, taken together can give a average cost curve, and parameters surrounding this usually become standard for a given market. This applies partly to the gist of this entry, inasmuch as to briefly introduce the concept of entry and exit costs. These costs are the amount of money required to enter a firm into a market, and the costs incurred to leave said market.
We have all heard of price fixing by supermarkets, and I have of course, blogged on this previously. The effect here is that when there are very few retailer to choose from, then it becomes possible for large firms to set the prices at which they sell to the public, and at which they buy from producers. The 'big four' set the price, for example, of milk which they sell on at an almost identical price. Small to medium sized firms have no choice but to adapt to this price because, although they can buy milk from producers at the same price as supermarkets, they cannot afford to undercut them, as the supermarkets will then buy more in bulk, driving the price lower, and so taking business away from small to medium sized shops. This makes the producers, small - medium retailers and the consumer 'price-takers'. That is to say, regardless of where they buy milk, they will pay much the same price.
So, why don't dairies simply tell supermarkets to take a price set by dairies themselves? This brings us to strategic competition and collusion. Individual dairies cannot take the risk of increasing their prices, as they will drive retailers to their competition, and suffer financially for it. The supermarkets, with modern refrigeration and transport methods (usually in house) could go abroad for their milk, meaning that dairies, cannot financially afford to do anything other than be price takers as the risk of financial ruin is too dire to contemplate. The entry cost for a dairy includes payment to farmers, transport to the dairy, the pasteurising and packaging plants, and staffing of these. A high entry cost to a market is usually mirrored closely by the exit cost. The dairies are, in this case, the victims of collusion by the large supermarkets, because they have, financially, no alternative other than to court their custom. Small - medium sized firms could not afford the transport costs to be supplied, so dairies could not rely solely on their business.
How then, can all this be applied to your mate's band when they play a gig? Well, in the 1990s, as mentioned at the beginning of the entry, venues, presumably a bit fed up (and reasonably so) of your mate's band playing to six of their mates and the bar staff, and a music promoter being someone who dealt with big ballroom or theatre venues, came up with Pay to Play, described above. I played with bands at this time, and at first, no one really felt any issue with the policy. After all, bands could now go to a venue, be put on a bill with some other bands from the local scene, (probably friends of theirs) and get their music played, often for the first time outside a rehearsal room. Huzzah! Bands got to play, venues got a guarantee of not running at a loss. (No one sets up in business to lose money after all). Where it began to go wrong was when the amount of gigs reached saturation point. Your local boozer would perhaps have live music one night per week, but now city centre venues were putting on gigs every night of the month. On one hand, this is brilliant for music lovers, with loads of bands to choose from. On the other hand, this was a nightmare for music lovers, since very few people can afford to to go to a gig every night of the month (or sustain that physically). This then meant that many music lovers simply stuck to what they liked, rather than take the risk of paying to see a band whom may not have floated their boat. An over supply of anything makes it cheaper. That is the most basic law of supply and demand, which inevitably meant that the bubble burst. Bands found it hard to compete with each other, and harder still to persuade all but the most devoted fans or partners to see them play so often. What remained constant then, and is still the case now, is that artists want their creativity to be on show. This kept bands coming back for more, taking the risk that, in order to showcase what they had crafted, they could be out of pocket. As long as this was true, venues were in a position of having 'price-taking' customers. Eventually, many bands were unable to maintain this financial suicide, and unable to commit to full time musicianship, keeping the dreaded "day job" for one of two reasons. 1. To support their musical ambitions, or 2. They could not earn a living wage as a musician. The proponents of this policy were able to continue operating as bars, still putting on bands, but with their draw diminished by the fall in the number of bands. This process took less than a decade.
Fast forward one decade more, and encouragingly, there are promoters working particularly within Glasgow and the surrounding area. This is a step forward for anyone who suffered from the drop in the music scene described above, since now, musicians could presumably get on with the business of crafting songs, while a promoter would, for a share of the income, book and promote your band's gig. So far, so good. Local promoters for local bands is something which, 20 years ago, could have been a boon for bands struggling to publicise their gigs, pre social networking sites. This represents, in economics terms, an innovation in the market. Innovations to an existing market always bring new impetus and customers to it. This seems to be borne out by the sheer number of gigs and bands on offer on most nights of the week. Oops, we seem to be forgetting the law of supply and demand again, no? We are now at the tipping point reached previously reached by venues in the 1990s, and this is being reflected in the reappearance of sharp practices which benefit everyone else first, and artist last. This where the idea of a continuous Industrial Revolution rears its head.
My first experience of this new breed of local promoter was as a solo artist. The deal, honestly made upfront was a 3/2 split in the promoter's favour. Entirely reasonable, since they had hired the venue. My next experience was of the same promoter, but the goalposts had shifted in a manner which I would not have agreed to had I known in advance. Instead of the previous (reasonable) deal, no it went like this. The promoter gets the income from the FIRST TEN tickets sold (they set the price), and the band would receive the income from any others sold. At first glance, some might see this as being reasonable, but it is just the same as Pay to Play because the artist will receive nothing below a minimum ticket sale. On this particular bill I had made a request to the promoter that only 3 bands ply the bill instead of the 5 normally crammed into their events. The reply was that this would mean the promoter would not cover their costs, and we compromised on 4 acts. This meant that 4 bands would be asked to play, but not to receive a penny until the promoter had made £50 from them. At a different event I attended, (same promoter and venue) to see my mate's band play, I was asked at the door which band I was there to see out of the 5 on the bill. Even though I was there to see initially one band, whether or not I had enjoyed all the acts I would have wanted them all to be paid equally.The venue being used (I researched later) cost £100 to hire, so a potential £100 to be made to simply telephone a bar and ask to hire it, then put an event page on a social networking site. On this basis, anyone could set themselves up as a promoter for an initial outlay of £100, depending on the hire cost of the venue. This is the entry cost referred to earlier, and this could be repeated. Since exit cost closely track entry costs, this is not a bank breaking risk to take, especially if you use sharp practices. If you set yourself up as a promoter, it will enable you to book many nights at venues in advance, especially during the period of early innovation when new customers will take what is on offer. This will make it difficult for a band to avoid using a promoter, and like the dairies, will become a price taker if there is only one game in town. Other bands will then potentially suffer from the lack of available gigs, so the rules of strategic competition mean that some bands will stick with the deal they are getting, to avoid the risk of not getting their music into the public domain. This is a part of the strategic competition known as 'the prisoner's dilemma', where the choice made as an individual will lead to a negative outcome for one or all players, or positive for all players, depending upon what each player wishes to achieve.
So, I've covered exit and entry costs, strategic competition, and price-taking. What about collusion? Collusion is very difficult to prove, and in some cases even more difficult to identify as being such. In this entry, I would suggest that the collusion could be between promoters and venues. Venues are guaranteed their money, because a hire contract has been agreed. Promoters stand a good chance of getting their money, since bands will use social networking and other types of advertising (the role of the promoter) to ensure they get as many people as possible to attend their gigs. But, if bands are willing to accept this type of deal, then are they more than simple price-takers? Only if they go into a deal knowing fully beforehand what the prospects are of being paid, it could be argued that they are in collusion too. Research and development costs are large parts of many firms costs. Could the prospect of playing for free, but getting your sound out here be counted as a research and development overhead? My suggestion is no. Research and development for a band is to practice playing, and writing material. Written word, music and art is an intellectual property, and the product of the artist, making the artist the golden goose in this scenario. Musicians are engaged to play. Promoters are engaged to promote the events at which musicians play, (even if the band has a Myspace, Facebook or Twitter account).
The collusion which some might argue is implicit between venues and promoters, and promoters and bands, could be ended in a choice of ways. Local promoters could innovate (some reputable promoters ask for no money, pay the artist, and offer to record and release your performance, only then requiring money to for a genuine overhead), leading to a shake-out in which unwanted promoters or venues would drop out of the running. Or, bands could simply decide not to be the price-takers of the piss-takers.
