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B-sides and Behavioral Biases:
Why Artists Are Better Off With Shorter Albums
Kevin Bessey
Mathew Madsen
Nathalia Myrrha
12...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
1 Introduction
Much has been written on the p...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
artists.
Record companies and artists album n...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
not have to sign up for a new account in othe...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
in popularity. This album was previously valu...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
most likely to purchase music online. Accordi...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
of the EP where respondents, on average, plac...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
may wish to restrict creative output to only ...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
Variable n Mean SD
EPval4 163 3.36 1.10
EPval...
B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums
References
Goldman, D. (2010). Musics lost de...
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  1. 1. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums Kevin Bessey Mathew Madsen Nathalia Myrrha 12 April 2016 Abstract Several experimental papers have been written regarding the conjunction bias which leads to a reversal of consumer preferences and the average bias which carries a “more is less” result in some situations. This paper seeks to add to the literature on preference reversal and explore the possibility of the average bias extending beyond the primary choice to have residual effects on subsequent, related market interactions. This hypothesis is tested in the context of digital music and live concert sales. The results support the established understanding of conjunction and average biases with participants valuing shorter albums of only high quality songs over strictly superior albums including incremental, inferior tracks. Moreover, there is evidence that this average bias extends to willingness to pay for live concert tickets for the artist of the evaluated songs. This result has direct implications for artists seeking to maximize earnings, but also suggests that the average bias has more far-reaching effects than previously understood. 1
  2. 2. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums 1 Introduction Much has been written on the presence of behavioral aberrations such as preference reversals and the average bias. These biases have been observed in a variety of settings: options to gamble (Grether and Plott, 1979), dinnerware (Hsee, 1998), and sports cards (List, 2002). This paper seeks to investigate the average bias in the context of digital music sales, and the potential effects on subsequent market interactions such as concert sales. File sharing and streaming has lead to interesting changes in intellectual property markets. The market for music in particular has significantly changed with such practices gaining popularity. Goldman (2010) showed that record companies have suffered an eight percent decrease per year in physical album sales. Many in the industry wonder whether they will receive a return on their investments. These changes have created some interesting forms of redistribution. Mortimer, Nosko, and Sorensen (2012) find that file sharing has lead to huge increases in concert attendance for smaller artists. They conclude that recorded music and live concerts are complements and that lesser known bands benefit from the exposure of their recorded music through increased revenue from live performances. File sharing has also influenced redistribution through sampling. In the current market, independent album sales make up 34.4% of the total market. Peitz and Waelbroeck (2006) show that file sharing can help consumers evaluate the quality of the artist. This leads to greater heterogeneity in the music market. In order for firms to more clearly distinguish their product and increase popularity, they need to let each single be a clear indicator of quality. Increased value through sampling would lead to increased album sales for individual 2
  3. 3. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums artists. Record companies and artists album need to be concerned about the valuation of their albums as they contribute to ticket sales and radio-based royalties. As demonstrated by Mortimer et. al (2012) increased sharing of music files leads to increased demand for ticket sales. In this paper we will explore the valuation methods of consumers and will test for conjunction bias in album purchases. We will also test to see how these valuations influence the valuations that artists would have for future shows. In the following experiment we will look at the valuation of Extended Plays (EPs) by common consumers and their impact on future concert attendance. EPs are essentially bundles of three to seven songs that are sold at a lower price than the cost of individual songs. This is a common practice in the music industry, by this method an artist can sell a group of songs to increase interest in their group. In our model, we use music recorded by an upcoming indie band. Using a relatively unknown artist reduces the risk of valuations being anchored to a know album or concert price for a particular artist, as might be expected with a more well-known group. In this experiment we will use two versions of their EP. In the first EP, we will include four of their most catchy and best recorded songs. In the second EP, we will include these four songs and three more songs that are neither as catchy nor as well recorded. These three songs are referred to in the music community as filler songs. 2 Experimental Design The experiment was conducted through iTunes, an online software used to organize and buy music. The advantage of conducting the experiment through iTunes is that individuals do 3
  4. 4. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums not have to sign up for a new account in other to participate in the experiment. Another advantage is that customers have already purchased credit in their account, which reduces transaction costs. The opening page of iTunes offers a right-side menu with features such as Purchased, Explore, Recommended For You, and My Wish List. For our experiment we added a “How Much Would You Pay?” tab, prominent placed on the top of the page and right above “Explore” on the right menu. The How Much Would You Pay feature offered albums of starting artists that were not offered elsewhere, and allowed customers to listen to a minute and a half of each song. Songs were previously rated and the ratings appeared horizontally after name, artist, and time, and before price. The tab had the following description “We are working with recording companies to determine album prices for starting bands. We would love your help in picking the price you would pay for each album.” Customers were then instructed to bid on albums’ prices taking into consideration the following criteria: after two days each person had submitted his/her bid, the system would rank bids from highest to lowest. It would then select a random number (j) between 2 and k (k bidders) and it would sell the album for the price the j-bidder proposed. For example, if the system chose j = 690 and this person had valued the album at $5.65, all customers between j and k (who had placed a bid higher than $5.65) would automatically buy the album at j’s price. The iTunes app randomly assigned customers to one of three treatments. In treat- ment IS (inferior separate) we auctioned off an album with four tracks, all rated 70% and above in popularity. The combined value of the songs as rated by music reviewers was ap- proximately $4. In treatment SS (superior separate) we auctioned off an album with seven tracks: the identical four tracks offered for treatment IS, plus three tracks rated below 30% 4
  5. 5. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums in popularity. This album was previously valued at $5.25. In treatment J (joint) customers were faced with the two previous track bundles side by side. Accordingly, each individual submits two bids, one for each album. They were informed that in case they won both bids, the system would randomly determine which action was binding. After each customer placed his/her bid, iTunes asked them how much they would be willing to pay to watch the same artists concert. Individuals elected a price and were thanked by their participation in the experiment. Because the valuation was not binding, users may not have revealed their true willingness to pay. However, this second evaluation allows us to learn the effects of album valuation on pricing of concerts, which leads to interesting insights not only for record companies, but artists themselves. A couple of observations are worth mentioning before proceeding to the next section. First, to prevent individuals from participating in more than one treatment group only those already logged in with their iTunes account were able to participate in the experiment. Second, in order for artists to have their music as part of the experiment they signed a contract binding them not to sell anywhere else until the experiment was over. That measure prevented customers from comparing prices with other websites, which would lead to bias in their bidding. 3 Results The experiment was very effective and was conducted without issue. Table 1 shows the sum- mary statistics for our experimental data. In all, we collected 240 observations with roughly an equal split between treatment groups. The experiment was targeted toward demographics 5
  6. 6. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums most likely to purchase music online. Accordingly, most respondents are between the ages of 16 and 30 with a nearly even split between males and females. Valuations of the shorter 4 track EP were collected for the IS and J groups while valuations of the longer 7 track EP were collected for the SS and J groups. Concert valuations were recorded for all participants. The most striking observation from the results of the experiment is shown in Table 2 by a comparison between the average willingness-to-pay of respondents exposed to the EP composed of purely high-quality songs versus those exposed to the longer EP including several “B-side” tracks in addition to the core songs. Those exposed to only the shorter (IS) setlist had an average valuation $1.23 higher than those exposed to only the longer (SS) setlist ($3.80 vs $2.57). A t-test on the difference in means yields a statistically significant result at the p < .05 level with a test statistic of t = 7.40. This shows a “more is less” result. Theoretically, since the shorter setlist is a strict subset of the longer version, unless the incremental tracks somehow provide negative utility, the longer version should be strictly preferred to the shorter version. This prediction is supported by the results from the joint group who were exposed to both versions of the EP, where respondents consistently placed a higher valuation on the longer EP. Respondents in the J group gave an average valuation of $3.83 for the longer EP compared to $2.99 for the shorter EP. A t-test on this difference in means yields a statistically significant result at the p < .05 level with a test statistic of t = 5.51. The results of the treatment groups, however, reinforce the “more is less” hypothesis showing a reversal of preferences compared to the joint group. Thus, respondents valuations are subject to the average bias where the inclusion of incremental substandard tracks lowers the average perceived quality of each track leading to a lower overall valuation of the EP. Again, this perverse result is not evident in the group exposed to both versions 6
  7. 7. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums of the EP where respondents, on average, placed a higher value on the longer setlist. Results for the second portion of the experiment are also given in Table 2. Again, a comparison between the average value that respondents place on a live concert for the artist in question shows that the average bias has implications extending beyond the primary transaction. A t-test on the difference in means for the IS and SS groups ($9.06 vs $7.70) yields a statistically significant result at the p < .05 level with a test statistic of t = 3.20. Interestingly, the mean concert valuation for the group exposed to both versions of the EP side-by-side was also lower than those who were solely exposed to the short, high-quality version. This further reinforces the more is less hypothesis. 4 Conclusion The average bias and preference reversal have been documented in a variety of settings. The results of our experiment reinforce existing research and show that the bias can have residual effects as evidenced by the continued bias in concert valuation. Other studies have shown this bias to be attenuated in more experienced individuals (List, 2002). While resistance to bias is generally considered to be a desirable trait, is not clear it would be desirable in this setting. Record label executives who are making track inclusion decisions may be less susceptible to the bias than consumers. This would lead to suboptimal outcomes for all parties since record labels may choose to include lower quality tracks assuming that they offer incremental value while consumers perceive lower value due to the average bias. Further, our results have implications for artists themselves. Many artists view album sales as building awareness to drive concert sales, where they make most of their money. Accordingly, artists 7
  8. 8. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums may wish to restrict creative output to only their highest quality work in an effort to avoid the adverse effects of the average bias on potential concert revenues. This is an area where more extensive research could validate these findings and further explore the residual effects of the average bias on subsequent decisions. For instance, future studies might attempt to make the valuation on the secondary transaction more binding than the simple survey question employed herein. The average bias is one of many cognitive biases which, when understood, can shed light on why people make the choices they do. Aside from this particular application of our findings, there are many business and policy settings where these results can affect change. Perhaps one of of the most relevant applications, however, would be in other markets for creative and artistic goods like books, movies and the like. We would expect that simi- lar biases would be found in such areas, and these results can better inform the decision making of agents these fields. Further research could validate this claim and provide more understanding of this widespread and relevant bias. 8
  9. 9. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums Variable n Mean SD EPval4 163 3.36 1.10 EPval7 166 3.25 1.18 Conval 240 8.22 2.57 Age 240 23.51 4.62 Female 240 0.47 0.50 Table 1: Summary Statistics Valuations Treatment 4 Songs 7 Songs Concert IS (n=74) $3.80 (1.03) — $9.06 (2.63) SS (n=77) — $2.57 (1.01) $7.70 (2.58) J (n=89) $2.99 (1.02) $3.83 (1.00) $7.97 (2.37) Table 2: Experimental Results Figure 1: Distribution of valuations by treatment 9
  10. 10. B-sides and Behavioral Biases: Why Artists Are Better Off With Shorter Albums References Goldman, D. (2010). Musics lost decade: Sales cut in half. CNN Money, 3. Grether,David M. and Plott, Charles. (1979) Economic theory of choice and the preference reversal phenomenon. American Economic Review, 69(4), 623-38. Hsee, Christopher K. (1998). Less is better: when low-value options are valued more highly than high-value options. Journal of Behavioral Decision Making. 11, 107-121. List, John A. (2002). Preference reversals of a different kind: the “more is less” phenomenon. The American Economic Review. 95(5), 1636-1643. Mortimer, J. H., Nosko, C., Sorensen, A. (2012). Supply responses to digital distribution: Recorded music and live performances. Information Economics and Policy, 24(1), 3- 14. Peitz, M., Waelbroeck, P. (2006). Why the music industry may gain from free downloadingthe role of sampling. International Journal of Industrial Organization, 24(5), 907-913. 10

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