Essay Question 1.
In this assignment I will divide the question into two parts. Firstly I will provide an overview of how the prices in the vertical chain for music compact discs correlates with how prices are divided according to the mentioned links in production chain of the music industry. Secondly I will by use of Porter’s five forces explain the pattern of this.
Very few big record companies heavily control the music industry. This is also known as Oligopoly, which makes the record companies price setters in the music industry and leaves them with significant more power than that of the artists and the retailers. This means that the record companies determents the price distribution between the links in the process from production to retailer. The record companies are responsible for managing everything in the process as above mentioned; signing up artists, handling technical aspects of recording, securing distribution and promoting the recordings. Because the record companies holds the main responsibility according to the production process and possess the most powers due to oligopoly, the record companies holds 3/5 of the approximate earnings. The artists are the price takers due to massive competition. The artists are highly dependent of the record companies and with virtually no or little difference in the cost of the artists and differentiation between the artists. The retailers are the price takers. Since the music retail business exists with a relatively high concentration of substitutes. The threat that the record companies will create their own music retail business and the threat of the digital music leaves the retailers with very little influence and power in the industry.
To explain the pattern of why the income in the music industry has been divided as given in the question I will use Porter’s five forces. With the concept of Porter’s five forces it is possible to break down the economics within a certain industry and describe that
The power of Suppliers
The providers of material in the music industry are the artists. There is a broad -and large range of artists willing to represent the record companies which means that the record companies are able to choose the artist with the lowest price in order to increase their profits. The wide variety of artists and talent also means that the switching costs between the artists are very low since they are relatively easy to replace. Differentiation in the music industry depends solely on the talent available. Since there is massive amount of talent available the power of the record companies increases while the power of the supplier decreases. Yet, some very big artists may be able to negotiate prices, but since the large record companies hold popular artists within each genre this again decreases the power of supplier. Bridge!
Since the record companies today hold the of income, the establishment of subsidiaries is preferable for some artists. The establishment of a record company does demand a significant amount of money for start up, a larger network within the industry and energy to manage the tasks that the incumbent record company normally would have done. This keeps many from establishing their own record company, but those that do establish a record company also increases the competition within the industry, which has a negative affect for the record companies. Yet, the threat of the suppliers’ forward integration is low and does not directly pose a threat to the large record companies.
The power of buyers
The powers of buyers (retailers) are in this industry weak. The retailers are threatened by the record companies, whom if they would, could distribute their own music. Moreover the switching costs for the buyer are high, as the low number of large record companies forces the retailers to take whatever price is given from the record...