Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 24

Superstars
There are "superstars" in virtually every walk of life. Top lawyers, physicians, CEOs, golfers, interior decorators, and rock musicians all make extraordinary amounts of money. In this example, we describe the economic theory of superstars generally and then look more specifically at the case of rock musicians.
The Theory of Superstars
Although economists have taken note of superstar salaries for more than a hundred years,1 the first detailed economic theory was described by Sherwin Rosen in 1981.2 He explains the extraordinarily large salaries of superstars as stemming from the fact that great talent is scarce. Individuals who possess economically valuable talents will be able to benefit both by charging higher prices for their services and by being able to sell more services. Hence, the total revenue received will increase more rapidly than will actual talent itself. For performance artists, this process will also be aided by the fact that serving increasing numbers of consumers may not involve any substantial increase in costs for the artist-a singer incurs roughly the same cost in performing for 10 people as in performing for 10,000. Artists with great talent will always possess some market power, but they will also face competition from other artists. The actual economic rents that any artist is able to achieve will depend on how many close competitors he or she has.
Evidence from Rock Concerts
The theory of superstars has been applied to a wide variety of pricing situations. In one especially enjoyable application, Alan Krueger used it to explain the rapid increase in the prices for rock concert tickets between 1996 and 2003.3 According to Krueger's data, the average price for a rock concert ticket increased by more than 80 percent during this 7-year period. Such increases exceeded by a wide margin increases in price for movie or sports tickets during the same period and seem to have occurred for both established stars and new artists. The increases do not seem to be explained by increases in the costs of putting on concerts. Indeed, those costs have probably fallen a bit as new audio technology has been introduced.
Krueger looks at three possible explanations for the increase in rock concert prices. First, he examines the possibility that the trend may reflect an increase in the returns to superstardom. In Rosen's original model, an increase in demand for the services of stars does indeed raise the relative returns of superstars. But, according to Krueger, that was not the case for rock concerts.
Krueger's second potential explanation is that the market for rock concerts may have become more monopolized after 1996. There was a major increase in the fraction of concerts handled by the largest promoters after 1996, so it is possible that the price increase represented an increase in monopoly power. But promotion of rock concerts was more concentrated in a few hands during the 1980s, and Krueger can find little evidence of large profits being made by promoters now.
The author's favorite explanation for the increase in ticket prices concerns the huge increase in illegal copying of music that occurred over the period he examined. Rock artists are in two businesses: performing in concerts and selling their music on CDs or over the Internet. Previously, because people who attended concerts were also likely to buy a group's CDs, performers had an incentive to keep concert prices low in order to expand CD sales. Recently, as CD sales have been eroded through illegal copying, artists may find the low-price strategy less compelling and choose to exercise their market power by raising concert prices. Krueger credits this hypothesis to the singer David Bowie, who warns his fellow performers that they had better get used to touring if they want to make any money in the future.
Some people argue that super star athletes, musicians, or CEOs don't "deserve" their high rates of pay because in any other occupation they would make far less. Do you agree with this characterization? Are such high rates of pay similar to monopolistic profits that may represent a distortion in resource allocation?