Winner-Take-All Markets
of Arts and Culture
10th International Conference
on Cultural Economics
Barcelona, June 14-17, 1998
Kimoon Cheong
Department of Economics
Kangwon National University
Chunchon 200-701
KOREA
Phone: 82-361-250-6126
Fax: 82-361-57-2271
E-mail: kimoon@cc.kangwon.ac.kr
Homepage: http://cc.kangwon.ac.kr/~kimoon
Winner-Take-All Markets
of Arts and Culture
Kimoon Cheong
1. Introduction
Sherwin Rosen (1981), in his well-known paper "The Economics of Superstars," describes the fact that rewards tend to be concentrated in the hands of a few top performers, with small differences in talent or effort often giving rise to enormous differences in income. It is no doubt that more talented performers should command higher returns. But what he argues is that the rewards to superstars are disproportionately skewed. Rosen attributes this high concentration of rewards to the interaction of restricted supply of the best talent with expanded demand due to market exposure.
Recently, Robert H. Frank and Philip J. Cook (1995), in their best-selling book, The Winner-Take-All Society: Why the Few at the Top Get So Much More than the Rest of Us, introduce the concept of "winner-take-all" markets while trying to explain the reasons of growing income inequality in the United States. They argue that the "winner-take-all" phenomenon spreads to wider range of industries and professions, not only in arts and entertainment industries but also in law, investment banking, consulting, journalism, medicine, corporate management, publishing, etc. The issues they raise in the winner-take-all markets are: growth in inequality, wasteful investment, wasteful competition, intense struggle for elite educational credentials, etc.
This paper tries to discuss why and how "winner-take-all" markets arise especially in the markets of arts and culture, and to seek for some cultural policy implications.
2. Winner-Take-All Markets
The winner-take-all reward structure is common in entertainment, sports, and arts industries. Although thousands of people are involved in making a major motion picture, the difference between commercial success and failure usually hinges on the performance of only a handful: the director, the screenwriter, the leading actors and actresses, and a few others. Although thousands of players compete each year in professional tennis, most of the industry's television and endorsement revenues can be attributed to the drawing power of just the top ten players. In professional sports the most productive athletes have become more valuable because of the large influx of television revenues. And owners of sports teams are forced to compete with one another for the most talented athletes.
In some markets, payoffs are determined by relative rather than (or in addition to) absolute performance. In tennis, for example, how much a player earns depends much less on how well she plays in absolute terms than on how well she performs relative to other players. Rewarded by relative performance is the most important distinguishing characteristic of winner-take-all markets. In the markets that we normally study, reward depends only on absolute performance, marginal product of the input. For instance, a production worker's pay depends on the number of units she assembles each week, not on how her productivity compares with that of other workers.
And in the winner-take-all markets rewards tend to be concentrated in the hands of a few top performers, with small differences in talent or effort often giving rise to enormous differences in incomes. Sherwin Rosen (1981) describes the market for classical musicians as following:
The market for classical music has never been larger than it is now, yet the number of full-time soloists on any given instrument is on the order of only a few hundred (and much smaller for instruments other than voice, violin, and piano). Performers of the first rank comprise a limited handful out of these small totals and have very large incomes. There are also known to be substantial differences between [their incomes and the incomes of] those in the second rank, even though most consumers would have difficulty detecting more than minor differences in a "blind" hearing. (Rosen, 1981, p. 845)
The fact that rewards are large and concentrated in many winner-take-all markets is of interest primarily because of its implications for income inequality. We would reasonably expect the more talented performers to command a higher return, but the rewards to superstars seem disproportionately skewed. Sherwin Rosen (1981) has attributed this to the interaction of restricted supply of the best talent with expanded demand due to market exposure.
Winner-take-all markets have increased the disparity between the rich and the poor. They have lured some of our most talented citizens into socially unproductive, sometimes even destructive, tasks. In an economy that already invests too little for the future, they have fostered wasteful patterns of investment and consumption. They have led indirectly to greater concentration of our most talented college students in a small set of elite institutions. They have made it more difficult for "late bloomers" to find a productive niche in life. The lure of these prizes has produced several important distortions in modern industrial economies. Perhaps the most important of these involves the influence of market signals on career choices.
3. Sources of Winner-Take-All Markets
Economies of Scale
In the winner-take-all market, the services of the best performers can be reproduced, or "cloned," at low additional cost. For example, once the master recording has been made, it costs no more to transcribe the best soprano's performance onto a compact disc than it does her understudy's. Once the film is in the canister, it costs no more to make an additional print of an Academy Award winner than any other. Once the television cameras have been set up, it costs no more to broadcast a tennis match between the first- and second-ranked players in the world than it does to broadcast a match between the 101st and the 102nd. If the best performances can be reproduced at low marginal cost, there is less room in the market for lower-ranked talents. Whenever there are economies of scale in production or distribution, there is a natural tendency for one product, supplier, or service to dominate the market. The battle is to determine which one it will be.
Network Externalities
A product becomes more valuable as greater numbers of consumers use it when network externalities exist. A well-know illustration is VHS's defeat of the competing Beta format in the VCR markets. Once the number of consumers owning VHS passed a critical threshold, the reasons for choosing it became compelling: variety and availability of tape rentals, access to repair facilities, the capability to exchange tapes with friends, etc.
IBM's MS-DOS format enjoyed a similar network externalities. Its initial sales advantage gave software writers a strong incentive to write MS-DOS based software. This in turn gave people a good reason for choosing IBM-compatible products even after other superior machines began to appear in the market.
Network economies are by no means confined to technological compatibility. If a book has been widely reviewed and discussed in the media, people have strong incentives to read it. This happens to movies, music, spectator sports, and a host of other interactive consumer activities.
In the network economies, small differences at the early stages of competition can prove decisive. Whether magazines and other newspapers review a novel, for example, is sometimes influenced by whether it has already been reviewed favorably or displayed prominently in the New York Times Book Review. One novel may reach the best-seller list while another of equal or higher quality lands on the remainder tables just because the New York Times happened to send the second book to an unsympathetic reviewer.
Acquired Tastes
A standard assumption in economics is that the more we consume of something, the less we are willing to sacrifice to obtain more of it. In many cases this assumption can be applied well. Yet there appear to be important exceptions to this pattern. For example, a new style of music that irritates on first hearing often grows much more appealing after repeated listening. We initially dislike some foods that go on to become favorites once we get used to them.
Art is said to be an "acquired" or "cultivated" taste; one has to be exposed to it for a considerably long time in order to develop the taste. The acquired taste is an interesting and important phenomenon in consumption of arts and culture. For example, the live performing art is an acquired taste, which grows stronger with exposure. This acquired taste makes substitutes less acceptable. Those who acquired a taste for ballet, opera, or the theater become "hooked" on the live performances. As the passion grows stronger, they become less concerned ablut the price of admission, and their demand becomes price inelastic (Gapinski, 1986).
Habit formation and acquired tastes often help to concentrate demand on a handful of top performers. It also suggests an underlying rationale for the phenomenon of brand loyalties, whose intensity often appears to transcend all narrowly economic measures of costs and benefits.
Status Goods
Another aspect of human nature that gives rise to winner-take-all markets is our tendency to value many goods not just according to their absolute properties, but also according to how they compare with the goods consumed by others. Such goods have sometimes been called "status goods." By its nature, the demand for top rank can be satisfied by only a limited number of products in any given category. And this, together with the fact that people are often willing to pay substantial premiums for top- ranked products, often gives rise to intense winner-take-all competitions between the suppliers of those products.
4. Wasteful Allocation of Resources
Although the competition for top positions in winner-take-all markets does indeed attract the most talented and productive workers, it also generates two forms of waste of resources: I) by attracting too many contestants, and ii) by giving rise to unproductive patterns of consumption and investment as contestants compete with one another for top positions.
Naive Optimism
Winner-take-all markets attract too many contestants in part because of our tendency to overestimate our chances of winning. Becoming a contestant in a winner-take-all market entails a decision to pit one's own skills against a largely unknown field of adversaries. A right decision requires a well-informed estimate of the odds of winning. Yet people's assessments of these odds are notoriously inaccurate.
The problem is that contestants for top positions tend to be naively optimistic about their odds of winning. A recent news clip, for example, reported that more than 60% of NCAA Division I college basketball starters believe that they will eventually start for an NBA team, whereas the actual proportion is less than 5 percent. Other surveys confirm this pattern. For example, most people think that they are more intelligent than the average person, and also better drivers. Workers asked to rate their relative productivity on a percentile scale responded with an average self-assessment of 77, and more than 90 percent felt they were more productive than the median worker. Only 2 percent of high school seniors reported that they had below average leadership ability. Ninety-four percent of university professors thought that they were better at their jobs than their average colleagues. People see themselves as more likely than their peers to earn a large salary, and less likely to get divorced or suffer from lung cancer. (Frank and Cook, 1995).
Many people are overconfident about their odds of winning in the contests. When people overestimate their chance of winning, the number who forsake productive occupations in traditional markets to compete in winner-take-all markets will be larger than the socially optimal one.
Too Many Contestants
It is not surprising that there are bad outcomes when people make important decisions on the basis of inaccurate information. What is more important and serious problem is that too many contestants tend to compete in winner-take-all markets even when people have completely accurate assessments of their odds of winning. Potential contestants in winner-take-all markets generally ignore an important cost imposed on others by their entry that each additional contestant reduces the odds that someone already in the contest will win. This leads too many people to compete in winner- take-all markets, and too few to seek productive careers in traditional markets.
Cultural goods require considerable amount of knowledge or trained skills as inputs in their production, which are embodied in the commodities. Those knowledge and skills are accumulated only by investment in human capital through training or education. This investment, however, is irreversible. The investment in human capital to produce cultural commodities is "sunk," which cannot be used for the production of other commodities. Skills for playing piano is useless elsewhere unless it is used in playing pianos.
An Example (from Frank and Cook (1995))
Suppose that a small island nation has five identical individuals. Each of them must choose between two occupations. One is to make pots that pays $12 per year. The other is to compete for a recording contract that pays $V (> $12) to the winner and $0 to the losers. All the contestants are equally likely to win. Each of them work one year and then live one year in retirement.
Then the winner's payment and the expected payoffs as functions of the number of contestants are as follows.
Number of
contestants Payment to
the winner ($) Expected
Payoffs ($)
1 20 20
2 32 16
3 42 14
4 48 12
5 50 10
Suppose that all are risk neutral. Then how many will compete for the recording contract? They are going to compete for the recording contract if expected reward is at least $12. Thus 4 of them want to compete. The total income of the society will be:
($48 X 1) + ($0 X 3) + ($12 X 1) = $60.
What is the socially optimal number of contestants? It is when marginal reward of the winner in recording contract is $12, i.e., when the number of contestants are 2. Then the total income of the society becomes:
($32 X 1) + ($0 X 1) + ($12 X 3) = $68.
Now, if the winning singer's income is taxed at the rate of 25%, how many contestants will enter?
Number of
contestants Payment to
the winner
before tax ($) Payment to
the winner
after tax ($) Expected
Payoffs
after tax ($)
1 20 16 16
2 32 24 12
3 42 31.5 10.5
4 48 36 9
5 50 47.5 7.5
People Individuals will enter the contestants if after-tax expected income is at least $12. Then two people will enter the singing contest, and this is the socially optimal number. The income of the society will be:
($32 X 1) + ($0 X 1) + ($12 X 3) = $68, or
($24 X 1) + ($0 X 1) + ($12 X 3) + $8 (tax) = $68.
This fact is very interesting that taxing the highest incomes leads to more output, not less.
References
Adler, Moshe (1985), "Stardum and Talent," American Economic Review, 75 (March): 208-12.
Frank, Robert H. and Cook, Philip J. (1995), The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us, Penguin Books.
Gapinski, James H. (1986), "The Lively Arts as Substitutes for the Lively Arts," American Economic Review, 76:2, (May)
Rosen, Sherwin (1981), "The Economics of Superstars," American Economic Review 71 (December): 845-58.
Rosen, Sherwin (1992), "The Market for Lawyers," Journal of Law and Economics 35 (October), 215-46.
of Arts and Culture
10th International Conference
on Cultural Economics
Barcelona, June 14-17, 1998
Kimoon Cheong
Department of Economics
Kangwon National University
Chunchon 200-701
KOREA
Phone: 82-361-250-6126
Fax: 82-361-57-2271
E-mail: kimoon@cc.kangwon.ac.kr
Homepage: http://cc.kangwon.ac.kr/~kimoon
Winner-Take-All Markets
of Arts and Culture
Kimoon Cheong
1. Introduction
Sherwin Rosen (1981), in his well-known paper "The Economics of Superstars," describes the fact that rewards tend to be concentrated in the hands of a few top performers, with small differences in talent or effort often giving rise to enormous differences in income. It is no doubt that more talented performers should command higher returns. But what he argues is that the rewards to superstars are disproportionately skewed. Rosen attributes this high concentration of rewards to the interaction of restricted supply of the best talent with expanded demand due to market exposure.
Recently, Robert H. Frank and Philip J. Cook (1995), in their best-selling book, The Winner-Take-All Society: Why the Few at the Top Get So Much More than the Rest of Us, introduce the concept of "winner-take-all" markets while trying to explain the reasons of growing income inequality in the United States. They argue that the "winner-take-all" phenomenon spreads to wider range of industries and professions, not only in arts and entertainment industries but also in law, investment banking, consulting, journalism, medicine, corporate management, publishing, etc. The issues they raise in the winner-take-all markets are: growth in inequality, wasteful investment, wasteful competition, intense struggle for elite educational credentials, etc.
This paper tries to discuss why and how "winner-take-all" markets arise especially in the markets of arts and culture, and to seek for some cultural policy implications.
2. Winner-Take-All Markets
The winner-take-all reward structure is common in entertainment, sports, and arts industries. Although thousands of people are involved in making a major motion picture, the difference between commercial success and failure usually hinges on the performance of only a handful: the director, the screenwriter, the leading actors and actresses, and a few others. Although thousands of players compete each year in professional tennis, most of the industry's television and endorsement revenues can be attributed to the drawing power of just the top ten players. In professional sports the most productive athletes have become more valuable because of the large influx of television revenues. And owners of sports teams are forced to compete with one another for the most talented athletes.
In some markets, payoffs are determined by relative rather than (or in addition to) absolute performance. In tennis, for example, how much a player earns depends much less on how well she plays in absolute terms than on how well she performs relative to other players. Rewarded by relative performance is the most important distinguishing characteristic of winner-take-all markets. In the markets that we normally study, reward depends only on absolute performance, marginal product of the input. For instance, a production worker's pay depends on the number of units she assembles each week, not on how her productivity compares with that of other workers.
And in the winner-take-all markets rewards tend to be concentrated in the hands of a few top performers, with small differences in talent or effort often giving rise to enormous differences in incomes. Sherwin Rosen (1981) describes the market for classical musicians as following:
The market for classical music has never been larger than it is now, yet the number of full-time soloists on any given instrument is on the order of only a few hundred (and much smaller for instruments other than voice, violin, and piano). Performers of the first rank comprise a limited handful out of these small totals and have very large incomes. There are also known to be substantial differences between [their incomes and the incomes of] those in the second rank, even though most consumers would have difficulty detecting more than minor differences in a "blind" hearing. (Rosen, 1981, p. 845)
The fact that rewards are large and concentrated in many winner-take-all markets is of interest primarily because of its implications for income inequality. We would reasonably expect the more talented performers to command a higher return, but the rewards to superstars seem disproportionately skewed. Sherwin Rosen (1981) has attributed this to the interaction of restricted supply of the best talent with expanded demand due to market exposure.
Winner-take-all markets have increased the disparity between the rich and the poor. They have lured some of our most talented citizens into socially unproductive, sometimes even destructive, tasks. In an economy that already invests too little for the future, they have fostered wasteful patterns of investment and consumption. They have led indirectly to greater concentration of our most talented college students in a small set of elite institutions. They have made it more difficult for "late bloomers" to find a productive niche in life. The lure of these prizes has produced several important distortions in modern industrial economies. Perhaps the most important of these involves the influence of market signals on career choices.
3. Sources of Winner-Take-All Markets
Economies of Scale
In the winner-take-all market, the services of the best performers can be reproduced, or "cloned," at low additional cost. For example, once the master recording has been made, it costs no more to transcribe the best soprano's performance onto a compact disc than it does her understudy's. Once the film is in the canister, it costs no more to make an additional print of an Academy Award winner than any other. Once the television cameras have been set up, it costs no more to broadcast a tennis match between the first- and second-ranked players in the world than it does to broadcast a match between the 101st and the 102nd. If the best performances can be reproduced at low marginal cost, there is less room in the market for lower-ranked talents. Whenever there are economies of scale in production or distribution, there is a natural tendency for one product, supplier, or service to dominate the market. The battle is to determine which one it will be.
Network Externalities
A product becomes more valuable as greater numbers of consumers use it when network externalities exist. A well-know illustration is VHS's defeat of the competing Beta format in the VCR markets. Once the number of consumers owning VHS passed a critical threshold, the reasons for choosing it became compelling: variety and availability of tape rentals, access to repair facilities, the capability to exchange tapes with friends, etc.
IBM's MS-DOS format enjoyed a similar network externalities. Its initial sales advantage gave software writers a strong incentive to write MS-DOS based software. This in turn gave people a good reason for choosing IBM-compatible products even after other superior machines began to appear in the market.
Network economies are by no means confined to technological compatibility. If a book has been widely reviewed and discussed in the media, people have strong incentives to read it. This happens to movies, music, spectator sports, and a host of other interactive consumer activities.
In the network economies, small differences at the early stages of competition can prove decisive. Whether magazines and other newspapers review a novel, for example, is sometimes influenced by whether it has already been reviewed favorably or displayed prominently in the New York Times Book Review. One novel may reach the best-seller list while another of equal or higher quality lands on the remainder tables just because the New York Times happened to send the second book to an unsympathetic reviewer.
Acquired Tastes
A standard assumption in economics is that the more we consume of something, the less we are willing to sacrifice to obtain more of it. In many cases this assumption can be applied well. Yet there appear to be important exceptions to this pattern. For example, a new style of music that irritates on first hearing often grows much more appealing after repeated listening. We initially dislike some foods that go on to become favorites once we get used to them.
Art is said to be an "acquired" or "cultivated" taste; one has to be exposed to it for a considerably long time in order to develop the taste. The acquired taste is an interesting and important phenomenon in consumption of arts and culture. For example, the live performing art is an acquired taste, which grows stronger with exposure. This acquired taste makes substitutes less acceptable. Those who acquired a taste for ballet, opera, or the theater become "hooked" on the live performances. As the passion grows stronger, they become less concerned ablut the price of admission, and their demand becomes price inelastic (Gapinski, 1986).
Habit formation and acquired tastes often help to concentrate demand on a handful of top performers. It also suggests an underlying rationale for the phenomenon of brand loyalties, whose intensity often appears to transcend all narrowly economic measures of costs and benefits.
Status Goods
Another aspect of human nature that gives rise to winner-take-all markets is our tendency to value many goods not just according to their absolute properties, but also according to how they compare with the goods consumed by others. Such goods have sometimes been called "status goods." By its nature, the demand for top rank can be satisfied by only a limited number of products in any given category. And this, together with the fact that people are often willing to pay substantial premiums for top- ranked products, often gives rise to intense winner-take-all competitions between the suppliers of those products.
4. Wasteful Allocation of Resources
Although the competition for top positions in winner-take-all markets does indeed attract the most talented and productive workers, it also generates two forms of waste of resources: I) by attracting too many contestants, and ii) by giving rise to unproductive patterns of consumption and investment as contestants compete with one another for top positions.
Naive Optimism
Winner-take-all markets attract too many contestants in part because of our tendency to overestimate our chances of winning. Becoming a contestant in a winner-take-all market entails a decision to pit one's own skills against a largely unknown field of adversaries. A right decision requires a well-informed estimate of the odds of winning. Yet people's assessments of these odds are notoriously inaccurate.
The problem is that contestants for top positions tend to be naively optimistic about their odds of winning. A recent news clip, for example, reported that more than 60% of NCAA Division I college basketball starters believe that they will eventually start for an NBA team, whereas the actual proportion is less than 5 percent. Other surveys confirm this pattern. For example, most people think that they are more intelligent than the average person, and also better drivers. Workers asked to rate their relative productivity on a percentile scale responded with an average self-assessment of 77, and more than 90 percent felt they were more productive than the median worker. Only 2 percent of high school seniors reported that they had below average leadership ability. Ninety-four percent of university professors thought that they were better at their jobs than their average colleagues. People see themselves as more likely than their peers to earn a large salary, and less likely to get divorced or suffer from lung cancer. (Frank and Cook, 1995).
Many people are overconfident about their odds of winning in the contests. When people overestimate their chance of winning, the number who forsake productive occupations in traditional markets to compete in winner-take-all markets will be larger than the socially optimal one.
Too Many Contestants
It is not surprising that there are bad outcomes when people make important decisions on the basis of inaccurate information. What is more important and serious problem is that too many contestants tend to compete in winner-take-all markets even when people have completely accurate assessments of their odds of winning. Potential contestants in winner-take-all markets generally ignore an important cost imposed on others by their entry that each additional contestant reduces the odds that someone already in the contest will win. This leads too many people to compete in winner- take-all markets, and too few to seek productive careers in traditional markets.
Cultural goods require considerable amount of knowledge or trained skills as inputs in their production, which are embodied in the commodities. Those knowledge and skills are accumulated only by investment in human capital through training or education. This investment, however, is irreversible. The investment in human capital to produce cultural commodities is "sunk," which cannot be used for the production of other commodities. Skills for playing piano is useless elsewhere unless it is used in playing pianos.
An Example (from Frank and Cook (1995))
Suppose that a small island nation has five identical individuals. Each of them must choose between two occupations. One is to make pots that pays $12 per year. The other is to compete for a recording contract that pays $V (> $12) to the winner and $0 to the losers. All the contestants are equally likely to win. Each of them work one year and then live one year in retirement.
Then the winner's payment and the expected payoffs as functions of the number of contestants are as follows.
Number of
contestants Payment to
the winner ($) Expected
Payoffs ($)
1 20 20
2 32 16
3 42 14
4 48 12
5 50 10
Suppose that all are risk neutral. Then how many will compete for the recording contract? They are going to compete for the recording contract if expected reward is at least $12. Thus 4 of them want to compete. The total income of the society will be:
($48 X 1) + ($0 X 3) + ($12 X 1) = $60.
What is the socially optimal number of contestants? It is when marginal reward of the winner in recording contract is $12, i.e., when the number of contestants are 2. Then the total income of the society becomes:
($32 X 1) + ($0 X 1) + ($12 X 3) = $68.
Now, if the winning singer's income is taxed at the rate of 25%, how many contestants will enter?
Number of
contestants Payment to
the winner
before tax ($) Payment to
the winner
after tax ($) Expected
Payoffs
after tax ($)
1 20 16 16
2 32 24 12
3 42 31.5 10.5
4 48 36 9
5 50 47.5 7.5
People Individuals will enter the contestants if after-tax expected income is at least $12. Then two people will enter the singing contest, and this is the socially optimal number. The income of the society will be:
($32 X 1) + ($0 X 1) + ($12 X 3) = $68, or
($24 X 1) + ($0 X 1) + ($12 X 3) + $8 (tax) = $68.
This fact is very interesting that taxing the highest incomes leads to more output, not less.
References
Adler, Moshe (1985), "Stardum and Talent," American Economic Review, 75 (March): 208-12.
Frank, Robert H. and Cook, Philip J. (1995), The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us, Penguin Books.
Gapinski, James H. (1986), "The Lively Arts as Substitutes for the Lively Arts," American Economic Review, 76:2, (May)
Rosen, Sherwin (1981), "The Economics of Superstars," American Economic Review 71 (December): 845-58.
Rosen, Sherwin (1992), "The Market for Lawyers," Journal of Law and Economics 35 (October), 215-46.
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