Music - A Market for Lemons

I have been reading recently about a paper written in 1970 by George Akerlof called “The Market for Lemons”. What originally drew my attention to it is Bruce Schneier citing it in a recent post where he applies the theories illustrated in the paper to the computer security market.

As Bruce states:

A used car market includes both good cars and lousy ones (lemons). The seller knows which is which, but the buyer can’t tell the difference — at least until he’s made his purchase.

As part of my work I am subjected to more and more of the music industry here in the US. The people I am working with just don’t understand why they aren’t getting uptake on music product like they were 20 years ago. They all point to piracy as the culprit, but I have always cited lack of a quality product and consumers getting smarter. As the labels consolidated they started putting out fewer artists and their marketing model changed. They lost touch with their customer.

As a music buyer I know I personally felt ripped off when I bought an album. Technology allowed the performances - even live ones - to be fake. Technology fails from time to time and this was exposed. Did people really think Paris Hilton could sing?

In a market where the seller has more information about the product than the buyer, bad products can drive the good ones out of the market.

There are big differences in the music industry in the US and that of Europe. In Europe performances tend to drive sales and its easier to be closer to the fan base because its not as distributed.

Don’t completely blame the music industry. American radio has had a part in the music marketing game and could have taken a more active stance in promoting real talent.

One last quote from Bruce’s article:

we have to rely on a variety of mediocre signals to differentiate the good…products from the bad…we choose…products based on the reputation of the company selling them, the reputation of some..wizard associated with them, magazine reviews, recommendations from colleagues or general buzz in the media.

The reputation of the music industry is their biggest block to sales right now, and they over-leverage copyright laws to control the media buzz and even magazine reviews. When some underground marketing takes place and turns into a success, they try to mimic and re-create that in their next marketing campaigns - in process putting controls in place and breaking down the very elements that came together to make it happen.

Revisiting George Akelof’s paper, a “lemon market” has these criteria:

1. Asymmetry of information
* no buyers can accurately assess the value of a product through examination before sale is made
* all sellers can more accurately assess the value of a product prior to sale
2. An incentive exists for the seller to pass off a low quality product as a higher quality one
3. Sellers have no credible disclosure technology (sellers with a great car have no way to credibly disclose this to buyers)
4. Deficiency of effective public quality assurances (by reputation or regulation)
5. Deficiency of effective guarantees / warranties

It certainly seems like the Music Industry in the US qualifies as a lemon market. I wonder if consumer response and piracy could be used as research to further the underlying Nobel winning economics principals. I’ll leave that for the economics hounds.

My rule of thumb is to know and like at least 3 songs from the CD before I buy the CD. That seems to keep the buyer’s remorse down and I can blame myself when I don’t follow my own rule.