08S7B trailblazers

The Wisdom of Crowds

I’ve been reading The Wisdom of Crowds: Why the Many Are Smarter Than the Few by James Surowiecki recently, and other than being a pretty popular book arguing against ‘common sense’, it also argues with economic principles.

One of the reasons I like this book is because some principles are explained pretty clearly, and you don't need that much economic background to understand his examples. But it does help, and I find myself appreciating the book much more now that I've taken Econs.

One of the relevant section that I would like to share is his example of American TV corporations. There is a season during which channels get their ratings, and so against all common sense American TV channels schedule all their newest and most popular TV programmes at the same time. The reason it’s bad for consumers is that when it’s not ratings season, consumers get re-runs and not-so-good TV shows. Now, James Surowiecki argues that corporations should have a friendly agreement because it would benefit them as well as the consumers; Americans wouldn’t experience the opportunity cost of missing House on Fox just because Heroes is showing on NBC. (This is my purely hypothetical example, in fact they show on different days!) And consumers tuning in to watch a channel helps it, because they can gain ad revenue while consumers gain enjoyment.

So this got me thinking. Why do American consumers let their TV corporations get away with it? Because it's an oligopoly. There are many barriers to entry, including licensing rights, advertising, customer loyalty, etc. so much so that new, small channels find it very hard to get on air and get popular, and if they do, to survive.

Something new to the world of television programming is cross-elasticity of television programmes and online TV. It might be because they weren’t very legal or widespread methods a few years ago. Some channels have already put lots of their episodes online, so you can catch it even when you miss it. So they probably have a pretty high positive cross-elasticity with the television programmes. So consumers can get to watch Heroes on TV while catching House on the computer and still get the same satisfaction as having watched House on TV. And having customers visit their website also lets channels gain ad revenue, so it's a win-win situation; the channels retain their customer base and consumers get to watch their favourite TV shows.

And the channels are pretty clever after all. Despite having kind of inexplicable competitive strategies during ratings period (after all, TV shows are highly differentiated and thus would have quite inelastic demand curves) they do see the demand and they’re moving to fill it.

The rest of book’s pretty cool too! Worth the read.

- Lim Yu

posted by Fishie @ 4:35 PM