The Economics of Superstars

Joint consumption technology combined with imperfect substitution of consumer preferences can lead to outsized rewards to a few superstars in mass entertainment businesses.

In certain kinds of economic activity, such as mass entertainment, there is concentration of reward among a few superstars. True, standard theory suggests that those who have above-average talent should earn more because consumers prefer to do more business with them. Consumer preferences also dictate that small differences in talent become magnified in large earnings differences. For example, if a surgeon were 10 percent more successful in saving lives than his fellows, most people would be willing to pay more than a 10 percent premium for his services. However, preferences alone are incapable of explaining the other aspect of the Superstar phenomenon, the marked concentration of output (and of reward) on those few sellers who have the most talent. So something else must be involved in this elusive quality of “box office appeal.”

This something else is best explained by technology rather than by tastes. In many instances, one consumer's consumption of the service does not reduce its availability to other consumers. Thus, a performer or an author must put out more or less the same effort whether 10 or 1,000 people show up in the audience or buy the book. The implied scale economy of joint consumption allows relatively few sellers to service the entire market - and fewer are needed to serve it the more capable they are. But this scale economy is limited without the technology to mass duplicate their performance for inexpensive asynchronous joint consumption.

For example, once the author tells his tale to the publisher, it can be duplicated in writing as many times as desired. A performer appearing on television literally clones his performance to whoever happens to tune in. Motion pictures, radio, television, phono-reproduction equipment, and other changes in communications have not only decreased the real price of entertainment services, but have also increased the scope of each performer’s audience. With elastic demands there is a tendency for increasing concentration of income at the top.

When the joint consumption technology and imperfect substitution features of preferences are combined, the possibility for talented persons to command both very large markets and very large incomes is apparent.