A quick break from the economics of Aesop, so I can talk about the economics of ABC’s Pan Am before it gets canceled. Not that I want it to get canceled; I watched the pilot and liked it. But the Nielsen numbers say I should speak now while it’s still topical...
For an economist, the most fascinating aspect of Pan Am is the highly attractive flight attendants -- or rather, stewardesses, since the show is set in the early 1960s. If you’re young enough, you might think that’s just TV. But I’m just old enough to remember flying in the 1970s, and I recall stewardesses who really were, in fact, hot. Okay, I was too young to understand the concept of “hot” -- but I was definitely aware that I was being attended by some very pretty young women.
Not so anymore. Flight attendants aren’t necessarily unattractive now, but they’re no more fetching than people in any other service profession that doesn’t get tips. And what’s changed? In a word, deregulation.
Prior to airline deregulation, which was passed in 1978 and completed over the next few years, airfares had been set by the Civil Aeronautics Board (CAB). For many routes, those airfares were simply too high. As predicted by a simple supply-and-demand model, airlines were willing to offer more flights at these high prices than customers were willing to buy. Under normal market conditions, that would lead to falling prices. But since the airlines legally could not compete on price, they competed on quality instead. They offered better service, better food, and... wait for it... more attractive stewardesses.
When deregulation came along, however, it became apparent that as much as male customers might have enjoyed the eye candy, they weren’t willing to pay for it. Higher quality might seem like a good thing, but it’s really only good if the benefit exceeds the cost. More attractive staff can command higher wages. The airlines could have continued to pay them, if the higher quality had attracted more customers. But as it turns out, most people just wanted to get where they were going, fast and cheap. Deregulation fueled a democratization of air travel, making what once was a luxury item available to nearly everyone. The number of people who fly at least once a year has more than doubled since 1978, while the population has grown by about 40%. These new customers have flocked to the airlines with no-frills or low-frills service, a trend that continues to this day (JetBlue, anyone?).
And y’know what? That’s a good thing, yet another efficiency gain from deregulation. There are plenty of other ways to see attractive women.
Tuesday, October 11, 2011
Pan Am and the Economics of Hot Flight Attendants
Saturday, April 30, 2011
U.S. Supreme Court Prediction Market
Recently posted to SSRN: FantasySCOTUS: Crowdsourcing a Prediction Market for the Supreme Court, a draft paper by Josh Blackman, Adam Aft, & Corey Carpenter assessing the accuracy of the Harlan Institute's U.S. Supreme Court prediction market, FantasySCOTUS.org. The paper compares and contrasts the accuracy of FantasySCOTUS, which relied on a "wisdom of the crowd" approach, with the Supreme Court Forecasting Project, which relied on a computer model of Supreme Court decision making. From the paper's abstract:
During the October 2009 Supreme Court term, the 5,000 members made over 11,000 predictions for all 81 cases decided. Based on this data, FantasySCOTUS accurately predicted a majority of the cases, and the top-ranked experts predicted over 75% of the cases correctly. With this combined knowledge, we can now have a method to determine with a degree of certainty how the Justices will decide cases before they do. . . . During the October 2002 Term, the [FantasySCOTUS] Project’s model predicted 75% of the cases correctly, which was more accurate than the [Supreme Court] Forecasting Project’s experts, who only predicted 59.1% of the cases correctly. The FantasySCOTUS experts predicted 64.7% of the cases correctly, surpassing the Forecasting Project’s Experts, though the difference was not statistically significant. The Gold, Silver, and Bronze medalists in FantasySCOTUS scored staggering accuracy rates of 80%, 75% and 72% respectively (an average of 75.7%). The FantasySCOTUS top three experts not only outperformed the Forecasting Project’s experts, but they also slightly outperformed the Project’s model - 75.7% compared with 75%.
You can download a copy of the draft paper here.
[Crossposted at Agoraphilia, Midas Oracle, and MoneyLaw.]
Friday, February 18, 2011
Condoms, Cheap Pizza, Beer, and . . . the Rule of Law
Condoms, cheap pizza, beer, lotto tickets, bongs, military gear . . . what have they got to do with the rule of law? LearnLiberty, a project sponsored by the the Institute for Humane Studies, recently aired a video that I wrote and narrated on the question. Enjoy!
Thursday, November 18, 2010
The Skin Trade
So it turns out there’s a market for infant foreskins that have been removed by circumcision (link via Marginal Revolution). A single foreskin can sell for thousands of dollars. A few thoughts that went through my mind in quick succession:
1. Revealing that some part of my brain still doesn’t think like an economist, I immediately thought: “What a gyp! The hospitals are getting money that rightfully belongs to the baby’s family!”
2. But wait a minute. The foreskin’s value should be incorporated into the price. The parents’ hospital bill for the birth week might be higher if foreskins weren’t sold. Hospitals that didn’t offer the foreskin-discount would lose customers to those that did.
3. But that conclusion depends on there being effective competition among hospitals. And in the current healthcare market, there’s some competition, but not very much.
4. So how could we find out? Maybe we could look for differences in hospital bills between male and female babies, or between non-Jewish and Jewish babies (since the latter would typically be circumcised outside the hospital).
5. But all this is complicated by the fact that circumcision is a surgical procedure, and therefore has some cost. What we really need for a proper comparison is a group of patients who do get circumcised by doctors, but under circumstances in which foreskin sale is not possible. And that suggests...
6. Adult circumcisions. Adult foreskins don’t have the special properties that infant ones do, so there’s no resale value. Problem is, ceteris paribus doesn’t hold here. Anesthesia is most likely different between adult and infant circumcision, and I suppose the difficulty of the procedure might also differ.
That’s about as far as I got. Anyone have suggestions on how we could discern whether the value of foreskins is incorporated into hospital prices?
Sunday, May 24, 2009
How Union Bullies Fund their Critics
The L.A. Times' blog recently reported that the Los Angeles police officers' union tried to bully the San Diego Union-Tribune into firing editorial writers who argue that "lawmakers should cut back on salaries and benefits for public employees in order to help close gaping budget deficits." Gail Heriot calls the incident "chilling," and with good reason. I see a bright side to it, however.
Platinum Equity, a private firm, relies on a $30-million investment from the union's pension fund, along with large sums from the pension funds of other groups of California government employees, to help it buy companies. Platinum recently acquired the San Diego Union-Tribune. The L.A. police officers' union thus regards itself as a part owner of the paper—one that has purchased the right fire unwanted employees.
Exactly how much clout the union actually has over the paper remains to be seen. The San Diego Union-Tribune has publicly rebuffed the union's demands. As Heriot observes, however, "threats like these can cause a newspaper to soft-pedal its views even when the threats aren't carried out."
So what is the bright side? Many newspapers face financial difficulties, and would welcome capital infusions. This imbroglio will suggest to alert publications a ready way to attract investments from government-employees' unions: repeatedly and loudly demand that lawmakers reduce those employees' salaries and benefits. In effect, unions have signaled their willingness to subsidize their critics. State action would never have that effect; there is no profit to be had in suffering censorship. Score another point for the relative efficacy of market mechanisms—even when used by ignorant bullies—in encouraging freedom of expression.
Saturday, February 14, 2009
Adverse Selection in BDSM Clubs
In last week’s Savage Love Podcast, Dan Savage responds to a 22-year-old female caller who digs BDSM. Her problem is that when she goes to BDSM clubs, she can’t find any young, attractive men. Instead, she mostly finds creepy, gross, dirty old men. In answering, Dan says:
[T]here’s a lot of attractive people into S&M, they’re just not necessarily at the BDSM clubs. … A lot of attractive people will dip in for a minute and say, “Wow, y’know, everybody here is way out of my league -- way, y’know, under my league.” And they don’t tend to come back, which makes the problem worse when the next objectively hot hottie comes along.To which my reaction was, of course, “Adverse selection! Dan’s talking about an adverse selection problem!”
But this isn’t your run-of-the-mill adverse selection, which usually happens in a context of asymmetric information. For instance, adverse selection can happen in used car markets because sellers know more about the quality of their cars than do buyers. As a result, sellers have to assess used cars by their average (not individual) quality. But in the BDSM club, one can quickly assess the age and hotness of specific people (or so Dan’s caller leads us to believe). So why can’t the hots simply pair up with other hots, and the nots with other nots?
The problem arises because people choose where to go based on their expectations about the quality distribution. If hot people into BDSM think there’s a reasonable likelihood of finding other hot people at the BDSM club, they will go there. If not, they will go elsewhere. And by not attending, they reduce the likelihood of hot people being there, thereby inducing other hot people not to attend either. The resultant unraveling leads to a club filled almost entirely with icky (or at least unimpressive) people.
So why doesn’t this problem happen at all clubs, not just the BDSM clubs? Well, to an extent it does. In some bars, you won’t find many attractive people. But there are other clubs filled with attractive people. You might expect the same kind of sorting to happen with BDSM clubs. The problem, I suspect, is caused by thin markets -- that is, markets in which the number of players is too small to generate the usual efficiency gains. People into BDSM are, I assume, a relatively small fraction of the general public; nevertheless, there are enough to create a demand for BDSM clubs, at least in large cities. But multiply the fraction of people into BDSM by the fraction of people who are attractive (by some standard of hotness), and you get a fraction small enough that it’s hard to get a thick market going. As a result, potential club-goers must consider the possibility that there might not be any attractive targets on any given night, and that leads to adverse selection.
I have not seen adverse selection explicitly connected to thin markets in any textbook I can recall, though a quick Google search for both terms pulls up a number of papers that appear to bring them together.
Sunday, November 16, 2008
The Mathematics of the Blame Game
I recently received a survey of economists on the subject of the financial crisis. The primary goal is to find out what economists believe caused the crisis. The various contributing factors fall into two basic categories, which I will call “government failure” and “market failure.” (Those aren’t the terms used in the survey, but that’s essentially what they are.) At one point, the survey asks the respondent to assign each category a percentage score for its contribution to the crisis, with the percentages adding up to 100%. For instance, you could say government factors were responsible for 60%, market factors for 40%.
The thing is, it should be possible for the percentages to add up to more than 100%. Why? Because some part of the crisis cannot be attributed to one category or the other; it can only be attributed to both.
An analogy. Say your spending on Coke has risen from $20/month to $45/month. This is because the price has risen (from $2 to $3) and also because your consumption has gone up (from 10 to 15 bottles). The total change is $25/month. How much of the increase is attributable to higher price, and how much to higher quantity? Well, if the price hadn’t increased, you’d be spending $15/month less. If the quantity hadn’t increased, you’d be spending $15/month less. As a percentage of the total $25 increase, each factor is responsible for 60% of the total effect, for a combined percentage of 120%. How is that possible? Because $5 of the increase resulted from both price and quantity having gone up; that is, $1 more per bottle multiplied by 5 more bottles.
Okay, so that example was probably too obvious. But I think that’s exactly what we have in the financial crisis. Some amount of the crisis is attributable solely to bad government behavior (like the Community Reinvestment Act and easy credit from the Fed). Some is attributable solely to bad market behavior (like excessive optimism and lying on credit applications). And some portion of the crisis is attributable to bad government policies having exacerbated bad market behavior. For instance, Fannie Mae and Freddie Mac – government-created entities with implicit government backing – helped to inflate the housing bubble.
No, I don’t know what percentage should be attributed to both categories. But I think it’s probably large.
If we must lump the combined effect into one of the other two for “blame game” purposes, there is an interesting philosophical question about where to put it. It depends a lot on what you take as given. My instinct, for instance, is to lump the combined effect into the government failure effect. Why? Because I largely take the propensities of market actors as given. Yes, people are greedy and overoptimistic and dishonest. But it was always thus. I don’t see basic human nature as fundamentally alterable. What matters, then, is whether government policy channels human nature in good or bad directions. On the other hand, if you start with government policy as given, then you’ll end up lumping the combined effect into the market failure effect. Which is the more reasonable assumption?
In addition, at least in the government category, there are two kinds of potential failure – broadly, “too much government” and “too little government.” And that’s actually where a lot of the debate is taking place, since liberals seem to think the main problem was that we needed more regulations, while market-types (like me) think a large part of the problem was too many (bad) regulations in the first place. Should lack-of-regulations be considered a market failure because regulations are supposed to rein in the market, or a government failure because government actors failed to enact them? (For what it’s worth, the survey includes “regulatory and surveillance policy” in what I’ve called the government category.)
Thursday, September 11, 2008
Housing and Mating Markets
In reading Tim Harford's article on why houses sell for more during the summer, I was struck by the similarity between his (well, Ngai and Tenreyro's) model of the housing market and my own model of the dating market. Here's Harford's description of seasonality in the housing market:
If Ngai and Tenreyro are right, then the housing market dynamic is something like this: buyers slightly prefer to buy houses in the summer, so house prices are slightly higher in the summer, so sellers prefer to put their houses on the market in the summer, and with more houses on the market, the market is thicker. That means that buyers are more likely to find the exact house they want, and so are willing to pay more; with prices higher, more sellers are attracted into the summer market, and fewer will contemplate selling in the winter. And so on. The self-reinforcing process can produce a large gap between summer and winter prices.And here's my description of seasonality in the dating market:
[The cycle] starts with the Rite of Overdue Dumping, in which people exit relationships that they stayed in just for the holidays. And then there’s a cascade effect: the knowledge that more people are entering the singles pool encourages yet more people to exit their relationships, thus adding yet more people to the pool, etc. More dumpings take place than would be predicted by the post-holiday effect alone. ... In short, the cycle is driven by the pre-holiday and post-holiday effects, but the cycle is exaggerated – with higher peaks and deeper troughs – by the fact that people’s break-up decisions are interdependent. It makes most sense to break up and reenter the singles market when other people are doing the same.Of course, Ngai and Tenreyo have actual data to support their claim, while I have nothing but anecdotal evidence. Anyone care to do the empirical work? Maybe Match.com would be the place to start.
Monday, May 19, 2008
Building Exits into CFTC Regulation
Much of my draft paper, Private Prediction Markets and the Law, focuses on nuts-and-bolts fixes for the legal uncertainty that currently afflicts private prediction markets under U.S. law. I'll say more about those in later posts to Agoraphilia and Midas Oracle. The paper also dicusses a more theoretical and general issue, though: The benefits of designing regulatory schemes to include exit options.
The Commodity Futures Trading Commission recently issued a request for comments about whether and how it should regulate prediction markets. In earlier papers, I explained why the CFTC cannot rightly claim jurisdiction over many types of prediction markets. I recap that view in my most recent paper, but add some suggestions about how the CFTC might properly regulate some types of prediction markets. In brief, I suggest that the CFTC build exit options into any regulations it writes for prediction markets, allowing those who run such markets the same sort of freedom of choice that U.S. consumers already enjoy, thanks to internet access to overseas markets like Intrade, with regard to using prediction markets. Here's an excerpt from the paper:
Those practical limits on the CFTC's power should encourage it to write any new regulations so as to allow qualifying prediction markets to operate legally, and fairly freely, under U.S. law. . . . Ideally, the CFTC would offer prediction markets something like these three tiers, each divided from the next with clear boundaries.
- Designated Contract Markets. Regulations designed for designated contract markets, such as the HedgeStreet Exchange, would apply to retail prediction markets that offer trading in binary option contracts and significant hedging functions.
- Exempt Markets. Regulations for "exempt" markets, which impose only limited anti-fraud and manipulation rules, would apply to prediction markets that:
- offer trading in binary option contracts;
- thanks to market capitalization limits or other CFTC-defined safe harbor provisions do not primarily support significant hedging functions; and
- offer retail trading on a for-profit basis.
- No Action Markets. A general "no action" classification, similar to the one now enjoyed by the Iowa Electronic Markets, would apply to any market that duly notifies traders of its legal status and that is either:
- a public prediction market run by a tax-exempt organization offering trading in binary option contracts but not offering significant hedging functions;
- a private prediction market offering trading in binary option contracts, but not significant hedging functions, only to members of a particular firm; or
- any prediction market that offers only spot trading in conditional negotiable notes.
Notably, regulation under either of the first two regimes would definitely afford a prediction market the benefit of the CFTC's power to preempt state laws. It remains rather less clear whether the third and lightest regulatory regime would offer the same protection, though the cover afforded by its two "no action" letters has allowed the Iowa Electronic Markets to fend off state regulators. Markets that by default qualify for the third regulatory tier described above thus might want to opt into the second tier, so as to win a guarantee against state anti-gambling laws and the like. So long as they satisfy the first two conditions for such an "exempt market" status, public prediction markets run by non-profit organizations or private prediction markets that offer trading only to members of a particular firm should have that right. Why offer this sort of domestic exit option? Because it would, like the exit option already open to U.S. residents who opt to trade on overseas prediction markets, have the salutatory effect of curbing the CFTC's regulatory zeal.
The footnotes omitted from the above text includes this observation: "Because they fall outside the CFTC's jurisdiction, markets offering only spot trading in conditional negotiable notes could not opt into the second regulatory tier."
Please feel free to download the draft paper and offer me your coments.
[Crossposted at Agoraphilia, Technology Liberation Front, and Midas Oracle.]
Tuesday, November 27, 2007
Writer-Producers and the Writers' Strike
In a previous post on the writers’ strike, I observed that writer-producers, such as show runners, were in the best position to represent the interests of both sides. Quoting myself: “Since writer-producers share in both the gains and losses from giving writers higher compensation, they seem relatively well-positioned to know what level of compensation would maximize the joint gains from trade.” Since writing that, I’ve seen a number of articles supportive of that claim. First, despite the attention given to the show runners who refused to cross the picket lines, it turns out that many show runners have not completely abandoned their posts:
The majority agreed to stop work completely, hoping that by shutting down production of popular shows, studios would become crippled and would capitulate, thus bringing the strike to a quick end. [Neal] Baer and other show runners vowed not to fulfill their producing obligations until serious negotiations resumed.Second, show runners apparently were instrumental in getting both sides to resume negotiations this week:
But a contingent of more than two dozen have quietly returned to work, editing episodes written before the strike began, according to talent agents and writers.
Their actions have stoked worries among writers about a repeat outcome of the last major Hollywood strike in 1988, when show runners went back to work after five months, undercutting the bargaining power of the guild, which ultimately agreed to terms that it had earlier rejected. [emphasis added]
But the strike is proving that show runners are beginning to call the industry's shots in ways that other traditional power sources -- trade unions, studio bosses, network executives, agents -- either cannot or will not do. Indeed, The Times and other outlets have reported that TV writer-producers, along with agents and a few influential screenwriters, played a crucial back-channel role in pressuring the studios and the guild to come back to the bargaining table.And the show runners are motivated to broker an agreement exactly because they have a foot in both camps and are losing in two different ways:
A powerful group of top writer-producers, who dominate television's prime-time schedule, also are highly motivated to stem the bleeding, both to save their shows from cancellation and to keep their staffs employed.I don’t know how long the strike will last, but I take the increasing involvement of writer-producers as a sign of hope.
Wednesday, November 21, 2007
Residual Thoughts on the Writers' Strike
The big elephant in the writers’ strike is the issue of residuals for “new media,” such as online sales and (at least until they were taken off the table) DVDs. Now, it’s completely understandable that writers would want a share of the new revenue streams. If the new revenue sources constitute an increasingly large slice of total revenues, then an old contract based on residuals from sources that are drying up (like VHS sales) will give writers a diminishing share of the gains from trade.
But there is more than one way to give writers a share of a revenue stream. Residuals are one way. Alternatively, we could calculate the expected present value of a stream of residuals, and then tack that amount onto the up-front payment for a writing job. Put simply, the choice is between (a) a smaller up-front payment plus residuals, or (b) a larger up-front without residuals. In expected value terms, the two are equivalent if the calculations are done right.
The equivalence between (a) and (b) doesn’t mean it’s a matter of indifference which is chosen. Arguably, method (b) is superior. It would allow better compensation for both writers and producers, for at least two reasons:
1. After a project is in the can, the writer has little or no further input. Producers, on the other hand, still have considerably input: they can set the price for sales of the product, decide the appropriate amount of marketing, and so on. So the important thing is to get the producers’ incentives right. Residuals paid to writers are like a tax; they reduce the producers’ benefit from pushing the product. They will thus invest less effort in promotion than they otherwise would. Get rid of the residuals, and the producers will market and price the product so as to maximize its net value. That means a bigger pie, a portion of which can be paid to writers in the form of even larger up-front payments.
2. Residuals, being dependent on future sales, are inherently more risky than up-front payments. Writers, like most people, are probably risk averse. Producers, on the other hand, get their funds from investors with diversified portfolios (of entertainment products and other investments), and they are thus closer to risk neutral. Moving from the residuals (a) to the higher up-front payments (b) would shift risky assets – uncertain future revenue streams – onto the more efficient bearers of risk. Meanwhile, the writers would get the equivalent of an insurance policy.
I’m hesitant to conclude that the residuals system is definitely inefficient, because its longevity in the entertainment business provides some evidence of its utility. Maybe there’s some other factor at work I’m missing that would make residuals desirable. In talking to writers and others in the industry, though, I haven’t found a convincing argument yet.
One friend pointed out, correctly I think, that residuals have a historical legacy that goes back to an era when writers had more control over the distribution of the product. For instance, Shakespeare wrote plays and directed the Globe Theater. This history has contributed to a notion that writers should get a share of all future revenue from their creations. But while this story may help explain where the residual system came from, it doesn’t show that it’s efficient now. Shakespeare was both a writer and a producer. We have now progressed to a system of greater division of labor, in which some people do the creative work while others provide the financial backing, distribution, etc. The real issue for writers should be whether they are compensated in a manner that induces them to do good work; if an up-front payment does that while providing better incentives to producers, that’s the way to go.
The best argument for residuals I’ve found so far is this: Writers are trying to guarantee themselves a certain share of the gains from trade. Because residuals are defined as a percentage, their size will rise and fall with the total revenue generated by the product, and thus writers will still have about the same (percentage) share regardless of what happens to the industry. If overall revenues rise, writers’ compensation will also rise; if overall revenues fall, writers’ compensation will, too. This is more difficult to guarantee with fixed up-front payments, although I’m guessing someone could devise a contractual formula for up-front payments that achieved the same effect. In any case, residuals serve this function effectively only if the contract specifies the right revenue sources. If the sources change, as happened after the last contract, then the writers’ share dwindles. What happens if the new contract specifies generous residuals for online downloads, and it turns out the next big thing is wireless direct streaming to the cerebral cortex, or some other delivery method we can’t even imagine? Remember, nobody foresaw online downloads, either. Up-front payments, on the other hand, have to be paid regardless of the eventual revenue sources.
I have one other possible justification for residuals in mind, but I haven’t fully worked it out yet. In the meantime, I invite readers to suggest other arguments for residuals – or further support for my suspicion that higher up-front payments would be superior – in the comments section.
Friday, November 09, 2007
More on the Writers’ Strike
Most of these points will be familiar to economists, but I hope my reiterating them is useful to others.
1. Like any strike, this is a classic case of people fighting over the division of a pie while the pie shrinks. The pie is the huge gains from trade that result from writers and producers working together, and every day that passes without a contract represents more unrealized gains from trade. Both sides lose as a result.
2. That does not mean it’s irrational or wrong for the writers’ union to strike. The gain they get from a larger slice of the pie could outweigh their losses during the strike period; clearly, the union leaders think so. Moreover, the situation is symmetrical; either side could end the strike by acceding to the other side’s demands. A strike occurs when both sides play hardball.
3. In general, unions drive wages above the competitive (market) rate, and this is why economists often don’t like them. A union is like a cartel, with many of the same ill effects, including underproduction. However, in this case, the producers are also negotiating as a bloc. I’m not sure what loophole in antitrust or labor law allows them to do so, but it’s common knowledge that they do. So what we’re looking at here is essentially a bilateral monopoly: one bloc of buyers, one bloc of sellers.
4. The bilateral monopoly emphasizes, again, the symmetry of the situation. Both sides have each the other over a barrel. A clear victory by either side would likely be inefficient. Set writers’ compensation too low, and writers will write too little; but set writers’ compensation too high, and producers will produce too little (and hire too few writers). Either way, we don’t get as much entertainment output as we should. Some writers on the margin could be shooting themselves in the foot by demanding too much, inasmuch as they won’t share in the higher compensation if they are not employed.
5. The efficient level of compensation for writers is far from obvious to me. This is why I find the ideological rhetoric employed by both sides, but mostly by the writers’ union, frustrating. Maybe the writers are getting paid too little, but I haven’t seen especially compelling evidence one way or the other. I’ll grant that insiders might have such evidence, but I doubt the rank-and-file know much more than I do.
6. Probably the best evidence I’ve seen that writers’ compensation should be higher than producers will agree to is the actions of writer-producers like show runners. Given their dual role, writer-producers were forced to decide which side of the picket line to stand on; on Wednesday, about 100 of them sided with the writers. Since writer-producers share in both the gains and losses from giving writers higher compensation, they seem relatively well-positioned to know what level of compensation would maximize the joint gains from trade. On the other hand, the article doesn’t state how many writer-producers did not side with the writers. Also, I wonder about the extent to which ideology and a sense of solidarity, rather than a concern with their own total compensation, contributed to their decision.
UPDATE: More here.
Thursday, November 08, 2007
Unions in Hollywood
The big news in my corner of the world is the writers’ strike. And I do mean my corner; CBS Studio Center is located just one-half mile down the road from my home, and I walked past the picket line yesterday on my way to get a sandwich at Subway.
So it seems only right that I should comment on the strike, and I do have some thoughts – but most of them aren’t conclusions. What makes it difficult to analyze the situation is my confusion about a more basic question: why are unions so powerful in the entertainment industry, when unions are generally weak and in decline in most other sectors of the economy? If you’re familiar at all with the entertainment industry, you’ll have realized that virtually every profession in it, from the actors to the writers to the directors, is unionized.
When I’ve posed this question to non-economist friends (including some in the industry), they have often pointed to various unusual or unique features of entertainment, such as its heavy reliance on creativity or its tendency to create superstars. But these features don’t really explain anything for me. Yes, the industry does rely on creativity; yes, it creates superstars; but why would these things make unions more powerful? There are missing links in the economic argument.
I have a hypothesis, though I’m not terribly confident about it. The entertainment industry is characterized by projects – films and TV shows – that require shifting constellations of players (studio, actors, director, writers, etc.). This is what makes the Kevin Bacon game fun – you can connect any actor to any other actor via a sequence of projects. I think this structure might enable a union-based equilibrium that would not be sustainable in industries with a more traditional structure. Imagine a studio trying to run a non-union production. Unless it’s doing a low-budget independent film, chances are it will want to employ at least some union members – if not now, then in some future project. But those players won’t participate in this project if it’s non-union. Why not? An actor – just like the studio – might want to do one non-union project, but he also wants to take part in future union projects. If you’re a union member, you can get kicked out for taking non-union jobs. The same goes writers and directors. While any given player – studio, director, writer, actor – might be willing to go non-union for a single project, they avoid doing so because they could get blackballed on future projects that require union participants.
Thus: Lots of people stay in their unions (by avoiding non-union projects) so they’ll be able to work in future projects that require union players; and future projects will indeed require union players because so many people are staying in their unions. Yes, it’s circular, but circularity is the essence of many an equilibrium: you drive on the right because everyone else drives on the right, and they drive on the right because you, among other people, are also driving on the right....
Anyway, that’s just my best guess. As I said, it’s really a mystery to me. It makes me feel better that Tyler Cowen is also perplexed by the power of unions in Hollywood. Feel free to offer alternative hypotheses in the comments... but if you do, be specific about the mechanism. I'll offer more thoughts on the strike in future posts.