jwilzewske: arts

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Tuesday, October 21, 2008

Performing Arts, Free-Market Failure, and New Institutional Economics

Market w/ externalities, social and private ‘goods’ and ‘bads’

W alt Whitman was democracy’s poet—who understood that democracy is not just a form of government but a way of life rooted in culture. Bill Ivey is culture’s eloquent advocate who knows that, as democracy needs the arts, the arts need the advocacy of government. His manifesto [Arts, Inc.] is a passionate attack on the commercialization of culture and a plea for a cultural ‘Bill of Rights’ that will restore to all Americans their right to a heritage, to creative expression and to a creative life. This is not just a vital book about the arts, but a vital book about democracy.”
— Benjamin Barber, author of ‘Jihad vs. McWorld’ and ‘Consumed’.

A rts, Inc.’ is the first comprehensive effort to explore the role and potential of a coordinated vision for art, culture, and expression in American public life. Through strands of personal and professional memoir, policy analysis, for-profit and nonprofit industry insights, and personal conviction, Bill Ivey defines a new canvas for more productive and inclusive conversations on the expressive life of our nation and its citizens.”
— Andrew Taylor, Bolz Center for Arts Administration, University of Wisconsin-Madison.

T he boom in music festivals poses a challenge to economists because of the glaring contrast to the financial distress that standing orchestras and opera companies and other performing arts entities find themselves in. Unit costs of production in the performing arts are still steadily increasing while labor productivity in the art is constant. This is the essence of [Baumol’s & Bowen’s] so-called ‘Cost Disease’. As a result, the performing arts ... are faced with a secular threat of survival because of [their] continually increasing cost relative to other consumer goods and services. The relevance of the Cost Disease has been challenged for various reasons. In particular, if demand [for concerts] rises more quickly than that for other goods (income elasticity > 1) and the price elasticity of demand is larger than –1, then prices and revenues can possibly be raised sufficiently to keep pace with the rising costs... The basic idea [of the validity of Cost Disease in the performing arts] has, however, been accepted and [today] provides one of the major building blocks for economic analysis of the arts.”
— Bruno Frey, Arts & Economics, p. 73.

Should we change our ticket prices or booking fees this year? How much discounting or comping should we do to get more attendee butts in seats and, if we do more than we’ve done in the past, will that help or hurt sales of regular tickets or subscriptions? If our ensemble does pro bono or deeply-discounted performances in some cities, will that help or hurt our bookings for bigger-margin gigs elsewhere?

These questions are perennial ones, for artists, agents, presenters, governmental and NGO policy makers, and others. For all of these stakeholders, the questions are even more salient during the present economic downturn.

There are several new books that elucidate how to go about making these decisions—both the microeconomic/operational ones, and the macroeconomic/policy ones. The books by Bruno Frey and by Bill Ivey are especially notable.

Frey maintains that people are genetically, evolutionarily disposed to seek status and strive for experiences—it is part of the psychology and ‘economy of happiness’, which is the subject of his new book. The analysis and its logic are, I think, particularly germane to chamber music and other of the performing arts. Frey focuses on ‘taxes on positional externalities’ [not necessarily the ordinary types of taxes; ‘taxes’ can equally well be embodied by specific, differentiated price structures such that not everybody pays the same price]. Economists who advocate ‘taxes on positional externalities’ underestimate the consequence of the innate human drive for status: when one outlet is blocked, individuals aggressively and reflexively seek alternatives to differentiate themselves. All economically-active individuals do this, able-bodied and non-able-bodied alike. Even if taxation of consumption were successful in countering negative positional externalities, people would still try to distinguish themselves. (The only ones who do not are those who are institutionalized or otherwise economically inactive.)

The positional externalities in those other dimensions might be weak, in which case the taxation of consumption differences may be warranted and effective, according to Frey’s theory. But if the negative external effects created by differences in the other dimensions are strong—as they are with performing arts—then taxation of consumption differences will be ineffective and counterproductive. Frey’s highly-readable chapters assess in detail the consequences of substituting other dimensions when positional externalities due to income or consumption are effectively blocked by taxation.

Frey is, in the end, open-minded as regards taxing positional externalities; he takes a pragmatic view, and makes his determinations on the goodness or badness of the consequences of the policies on a context-sensitive, case-by-case basis. For Frey, the answer to the public agency’s or presenter’s or manager’s or ensemble’s question of whether positional externalities due to differences in income and consumption should be taxed depends on the effects of taxation on incentives, on consumer’s buying decisions, and on the resulting net public welfare. If the nonprofit presenter (or government or other agency) tries to reduce prevailing inequalities by setting a ticket price-structure (or discount or comp ticket policies that back-handedly ‘tax’ those who are more able to bear a larger expense) and that price-structure only weakly affects the buying decisions of those market segments who are affected by the top-tier prices, then the taxation is effective and justified in terms of the net public welfare or public good. If, on the other hand, the ‘progressive tax’ on positional externalities in income and consumption causes the top-tier market segments to transfer their drive for status to other consumables or other dimensions, then the pricing/taxation scheme is ineffective and unjustified, on the grounds that it harms the public good.

Under Frey’s rubric, the same could be said of performing artists or ensembles. If an ensemble establishes a ‘progressive taxation’ structure in which engagements have booking fees priced according to the ‘ability-to-pay’ and/or incremental kickers (‘base-plus-percent-of-boxoffice’) and this policy does not deter presenters from booking the ensemble, then the scheme can be said, post facto, to have been effective and justified. By contrast, if many presenters will not accept the price structure and terms, then in hindsight it can be said to have been a failure and unjustified in terms of the net public good, insofar as the pricing will have deprived the public of valuable cultural experiences or in some way diminished the cultural diversity.

Ivey’s book analyzes the consequences of relentless corporatization of the arts and of performing arts outputs in particular. Bill Ivey had served as NEA Chairman from 1998 to mid-2001. While he had prior to that time had a long career as head of the Country Music Foundation and as an advocate for the arts, it was that 3-year term of service that appears to have galvanized his concept of the arts as a collection of public goods—a set of resources as vital as clean air and water and endangered species and wilderness—to which everyone has a basic human right, and to which government and other institutions owe a duty of stewardship. Prior to 2002 he would merely preach; but today in this book his ‘hair is on fire’ as he expounds prophet-like words of alarm and proposes essential elements of public arts policy in his call-to-arms.

V ery few observers of the contemporary U.S. and global arts worlds have Bill Ivey’s capacity for first-hand examples of how trade representatives, artists, music executives, corporate attorneys, elected officials, non-profit executives and many other participants influence the course of the arts, and in particular, the public’s access to the arts. ‘Arts, Inc.’ is an important work because it asserts, in an urgent manner, that people have a right to a better expressive life.”
— John Kreidler, formerly Executive Director, Cultural Initiatives-Silicon Valley.

These recent books are each, in their own ways, emblematic of New Institutional Economics (NIE), an interdisciplinary field that has emerged since about 1995, combining economics, law, organization theory, systems engineering, neuroscience, philosophy, political science, sociology, and anthropology—to understand the institutions of social, political, and commercial life, and to help set policy and perform quantitative program evaluations. The objective is a set of rational frameworks for future developments of regional politics, regulations and protection, infrastructure amenities, finances and taxes so that the public goods are sustainable and can have durable popular support. NIE inevitably entails intensive political re-evaluation. NIE draws upon various social-science disciplines, but its primary language is economics. Its broader goal is to characterize what our societies’ institutions are, what purposes they serve, and how they change and how they might best be improved and changed—all institutions, not just arts organizations. Have a look at the International Society for New Institutional Economics (ISNIE) and other of the links below to find out more about this.

It’s these days inconceivable that politicians or government agency officials will choose well or support a sufficient diversity of programs or foster robust innovation and creativity. The politics of divisiveness and fear and recrimination is too extensive, and CoverYourAss ‘cartels’ are too strong.

But it’s also lately inconceivable that the illustrious so-called free market will sustainably support diversity in the arts either. The free market has done so well, after all, in messing up such ordinary things like banking. Leaving things to the free market, we end up with ‘McWorld’ lowest-common-denominator populism and commodification of the arts.

So NIE-style approaches and deep re-evaluations of the sort that Bill Ivey and Bruno Frey are advancing are therefore timely. I strongly recommend that you pick up copies of their books. And, imagining that some of you CMT readers may like to contact Bill or Bruno regarding speaking to your group or collaborating on research or other activities, I’ve put their contact coordinates in the links below.

Thursday, October 16, 2008

Merge Two Competing Chamber Music Presenter Organizations?

T he effect of the economic downturn is already pronounced—in terms of our subscription sales and attendance so far this season, and in terms of corporate and foundation money. I wonder whether, if we merged with the other main chamber music organization in our city, we might do better overall. The reason I think the answer may be ‘yes’ is that our respective programs tend time and again to collide with and compete against each other for the same audience. For example, two pianists in one week--the other org’s program on Friday night, ours on Saturday night. Or two early music programs within a fortnight. The ‘supply’ [of chamber music programs] exceeds the ‘demand’ in our market area, or at least exceeds our audience members’ monthly budgets of time and money. CMT sometimes has spreadsheets and math [to illustrate how some process works or to provide a tool to help CMT readers’ decision-making]. Could you do something in Excel to show whether there would be financial advantages or disadvantages if we combined with our competitor? The assumptions would be that we would have the same number of events each season [Presenter P’s events + Rival R’s events]; the prices and expenses would be the same [P + R roll-up]; the staff would be the same [P + R, with executive co-directors and artistic co-directors]; and the corporate and foundation funding would be the same [P + R]. If we merged, we would just coordinate our programs to not compete—to more efficiently and effectively serve the demand in our community. Possible?”
— Anonymous.

The performing arts market is tremendously fragmented. That fragmentation inevitably leads to inefficiencies. There are more than 520 presenter entities who are organizational members of Chamber Music America. And one thing that’s clear from examining CMA’s directory of chamber music presenters is that communities in the U.S. that have performing arts markets that are robust enough to have one presenter tend in fact to have two or more chamber music presenters. In many cases, that means that there is relatively intense competition for what is almost certainly a finite market—a finite monthly or quarterly consumer spend per household. Probably the same is also true in cities in Europe and the U.K.

For simplicity and to directly respond to the anonymous emailer’s question, I’ve put together a mathematical model that is for two competitors in a market—a duopoly. It would be far more complex to create an accurate, actionable financial merger model for three or more competitors. Actually, if the proposition were to simultaneously consolidate three or more competitors into one unified presenter organization, then you could still use this Cournot-Nash game-theory model as-is. You would simply put your own figures in as Presenter P, and then sum the figures for all of your competitors and put those sums in the Rival R column.

Basically, you need the ticket sales (earned income) figures for you and your competitor for last season's events—not the ticket drop numbers (with comp tickets and other imponderables) but the cash money taken in. You can exclude the events that each of your orgs produced that did not compete with each other at all—because they were far enough apart (say, more than 4 weeks) so that it’s implausible that a potential audience member would’ve decided to decline to attend your event because they were already attending your competitor’s event, or vice versa. Then you adjust the up-down arrows so that the accomodation figures match your last-season historical values, and so that the Cournot-Nash duopoly figures on the left more or less match the last-season actual average per event period figures on the lower right. (Just click on either of the screen-shot images below to Open or Save_as the Excel spreadsheet.)

Program ‘event periods’ means any interval of time during which the competitors’ programs compete against each other for consumers’ dollars. It doesn’t have to mean conflicting events on the exact same dates. It may be events on adjacent dates, such that attendees who otherwise would like to attend both programs probably will not buy tickets and attend chamber music concerts on two consecutive days. It may be events during the same week or fortnight, with the same criterion that most members of the target market may not attend two or more chamber music events within, say, 10 days of each other.

There are a number of assumptions and limitations of this simple Cournot-Nash model of financial competition:

It doesn’t take into account the possibility of ‘curvature’ of the elasticity of demand;
It ‘linearizes’ the [possibly non-linear] competitive interaction;
It uses the statistical covariance cov(P,R) between the competitors as the measure of the ‘accomodation’ effect of the sales of one presenter on the competitor’s sales, which, while simple, may be a far-from-ideal metric of the competitive economic interaction between the two;
It doesn't account for potential greater-than-additive ‘synergies’ in terms of induced greater demand or brand-recognition or marketing effectiveness that a merged entity might achieve;

and so on. But for a basic, first-order model it does pretty well. It can give you realistic estimates of how strong or weak the competitive process is in your market. And it can give you reasonably accurate, quantitative guidance regarding how large or small the impact of merging/consolidating would be.

With the insights you glean from playing around with this simple model, perhaps you will try to arrange your programming timing and content so as to minimize the numeric value (covariance) of your own ‘accomodation’ to your competitors—i.e., select your artists and programs so as to make your own ticket sales very insensitive to the programming that your competitors present, while simultaneously maintaining your ‘brand’ and maximizing the demand for the programs you select and book.

This simple model can be used to devise other strategies: to make your organization attractive for a merger or, conversely, to make your organization an unattractive target (by removing any appearance of financial advantage associated with combining and coordinating programming so as not to compete). ‘Accomodation’ values that are large (> 40% for one or both competitors) tend to predict financial gains for a merged entity that are upwards of 30% compared to the total annual sales with each competitor separate. Conversely, ‘accomodation’ values that are low (< 10% for one or both competitors) tend to predict that merging the competitors would not net much income growth for the merged entity—growth of 15% or less.

So please have a look at the model. Send me email or comment on it if you wish. And give us your thoughts in the poll that’s embedded in this post. (Note: Your participation in the online poll does not disclose your own identity or your organization’s identity, nor does it reveal anything about your community. It does not collect information other than which selection you click on.) Thank you!

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