The Economics of the Popular Music Industry

Music entertains us, influences us, and shapes our lives. From the message to the medium to the physical experience of listening to a live performance, music has charms to soothe the savage breast. Rock and roll used to be a way for people to stick it to the Man. Is that still possible in today’s corporatized world? Technological development has played a key role in music production and consumption. From the Sony Walkman to its modern day equivalent, the smartphone, technology affects how musicians create their work and how listeners experience it. This book examines the popular music industry from an economics perspective. It will examine how music is produced and consumed and investigate the role of technology in the business of music.

This section will cover the supply and demand model and basic consumer theory, including budget constraints, indifference curves, utility maximization, and constrained optimization. It will be useful to apply economic theory to the changes in the music industry as they relate to goods that are perfect substitutes and perfect complements. Technology has eroded copyright protections and enforcement, and pirated music became a substitute for legal (purchased) music. Now streaming services are the predominant way to consume music.

This section covers basic producer theory, including cost curves and the firm’s profit maximizing decision rule for production. The types of market structures that will be discussed are perfect competition, monopoly, and oligopoly. The music industry is an oligopoly in that there are a handful of large firms that control a majority of the market. There are several barriers to entry that enable these firms to maintain persistent economic profits, namely ownership of intellectual property, high startup costs, and economies of scale. There are also game theoretic implications for the firms in the oligopoly market structure and basic games of strategy (Prisoner’s Dilemma and the Cournot Model) will be discussed. A thorough grounding in producer theory is necessary to understand the production of music in physical formats like CDs or LPs, and digital formats like digital files or streaming.

It is hard to overstate the impact the pandemic had on the music industry, particularly for live music events. As David Bowie predicted, touring and performing live had become the only unique things left for musicians. In the streaming and peer to peer file sharing era, touring has become a vital part of any musician’s income. Many legendary bands and musicians have hit the road again in recent years, using touring as their primary means to make a living. But during the COVID pandemic, most were unable to tour, eliminating this source of income. This chapter discusses the impact of the pandemic on the music industry, and the ways that industry players adapted to the loss of revenue associated with pandemic lockdowns.

There are developing music markets around the world, and technology has made it easier for musicians to reach fans in faraway places. Global music markets are important on a domestic basis as well as for more export-oriented growth. The major labels have signaled their interest in reaching these markets by establishing branch offices in various regions, including the Middle East and North Africa. Each country has unique preferences for types of music and ways to consume it. Any musician looking to break into these markets must consider how to tailor their offerings in terms of the kind of music they make, the languages they perform in, and the ways that local and national markets produce and consume music in either physical or digital form. An example of music that has transnational appeal is K-pop, with stars trained at an early age to become appealing media figures. K-pop has played a significant role in influencing how music is made and marketed, and has become a significant part of the South Korean government’s emphasis on cultural products as a form of soft power.

The music business appears to be (almost) the same as it ever was, with a handful of large firms maintaining control over the production and distribution of music. With significant economies of scale, it makes economic sense for these firms to use their market power to produce music efficiently and cheaply. But musical innovators have challenged the dominant paradigm and many have struck out as independent artists with control over their artistic creations. Technology has and will continue to enable them to do so, leveling the playing field for new musicians to find better ways to create and distribute music.