Stochastic Demand and Sound Recording Pricing

Theo Papadopoulos, Clyde Rolston
2006 Journal of the Music and Entertainment Industry Educators Association  
Introduction The market for sound recordings is often described as a market for hits. This reflects the concentration of sales and revenues in a small number of sound recording title releases. While record companies are multiproduct firms, releasing thousands of new titles per year, demand is difficult to ascertain in advance with the vast majority of new titles representing financial failure. Combined with a life cycle often measured in weeks, this uncertainty undoubtedly impacts release
more » ... pacts release behavior, label-artist contract terms, and pricing. This paper explores sound recording pricing in the presence of uncertain demand and suggests that relatively uniform pricing across all titles, compared to a more dynamic pricing structure, is both more pragmatic and workable. Price rigidity is often a feature in oligopolistic markets, with claims of collusive price fixing and monopoly profits commonplace. The music recording industry has itself been the focus of antitrust litigation (relating, for example, to minimum advertised pricing and payola) suggesting the existence of market power and the potential for collusive behavior. While collusion may partly explain price rigidity in the market for sound recordings, this paper offers an alternative, less sinister motivation for uniform pricing: namely, stochastic demand. The stochastic nature of demand is highlighted by a sales probability distribution (utilizing sales data for 2004) and represented diagrammatically in an elementary price determination model in the presence of uncertain demand and uniform costs. The paper also examines the implications of uncertain demand for a label's profit function in the presence of uniform pricing and the implications of unequal title-specific establishment costs. Uncertain Demand A record company is a multi-product firm releasing numerous sound recording titles per time period. Marketing and promotion of artist-specific
doi:10.25101/6.3 fatcat:btqx6hsk7bebnmieqgbcir24gu