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Sunk costs and the dynamics of creative industries

Gerben Bakker

Economic History Working Papers from London School of Economics and Political Science, Department of Economic History

Abstract: This chapter examines the long-run evolution of modern entertainment industries such as the film and music industries. It investigates ways to conceptualise and quantify the subsequent waves of creative destruction, and investigates specifically how sunk costs affect the evolution of the industry through its interaction with variety, market integration, product differentiation and price discrimination, and how old entertainment formats almost never became extinct. It finds that within this framework, four economic tendencies shaped the entertainment industries evolution: first, endogenous sunk costs often led to a competitive escalation of production expenditures, which we call ‘quality races’, which increased industrial concentration. Second, the fact that marginal revenues largely equalled marginal profits led to extreme vertical integration through ownership or revenue-sharing contracts, as well as to an oversupply of variety and a dual market structure with high-concept blockbuster products and low-budget niche products. Third, entertainment’s public good characteristics led to substantial income inequality among creative inputs and business models optimising exclusion possibilities in the value chain. Finally, the project-based character of entertainment production implied large intra- and inter-industry agglomeration benefits and often led to geographical concentration. Dynamic product differentiation allowed various old formats to survive the waves of creative destruction, albeit in much smaller incarnations.

Keywords: sunk costs; market structure; dynamic efficiency; price discrimination; history; creative industries; motion pictures; videogames; music; live entertainment; dynamic product differentiation; quality races; industrialisation; horizontal and vertical product differentiation; agglomeration economies; total factor productivity; revealed comparative advantage; variety; vertical integration; business models. (search for similar items in EconPapers)
JEL-codes: N0 R14 J01 (search for similar items in EconPapers)
Date: 2012-12
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