Tuesday, July 14, 2009

Vertical Integration in Live Music Industry

A few weeks ago, Ticketmaster and Live Nation announced they are merging. This is a fairly good example of the economic model comparing vertical integration and vertical separation. Let's get the basic idea using Ticketmaster and Live Nation as an example. Suppose that Ticketmaster is a monopolist in the live music ticket sales market - which admittedly is not exactly true, but Ticketmaster has a very high market share that this is not that far fetched an assumption. Likewise, let's assume that Live Nation is a monopolist in concert promotion, which again is not exactly true, but they are the largest in the world.

Then in economic terminology, Ticketmaster is the downstream firm and Live Nation is the upstream firm, where being upstream is farther away from the final customer - the concert attender. If Ticketmaster is the downstream firm and Live Nation is the upstream firm, and Live Nation "sells" its services to Ticketmaster, the two firms remaining separate will lead to profits for each firm, with a final price to the concern goer and a number of concerts produced. But here is the interesting thing, if you allow these two monopolists to merge, it is possible for the overall number of concerts produced to increase, the final price of concert tickets to decrease and the combined profits for the two merged firms to increase. In other words, this is a win-win strategy for both the consumers and producers of live concerts. And in class I will go through how this works.

For another interesting article and some of the back story, see here.

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