Winner-take-all and the long-tail: in response to Robert Frank

Robert Frank, in an interesting column in the NYT on the implications of technological change, argues that the winner-take-all scenario is likely to prevail over the long-tail scenario. I think it's important to distinguish between homogenous and heterogenous goods and services. For example, one of Professor Frank's examples is piano manufacture in the nineteenth century.

Piano manufacturing was once widely dispersed, for example, simply because pianos were so costly to transport. But with each extension of canal, rail and road systems, shipping costs fell sharply, and at each step production became more concentrated. Worldwide, only a handful of piano makers remain, as producers with even a slight edge have ultimately captured most of the industry’s income.

This is the textbook winner-take-all scenario. Those with the greatest comparative advantage, even if that advantage is small, drive their lessers from the market, and capture all gains to production.

Professor Frank compares the piano makers with the sellers of digital music downloads, citing research that indicates that "Digital song titles selling more than one million copies, for example, accounted for 15 percent of sales in 2011, up from 7 percent in 2007." This, according to Professor Frank, goes against the long-tail theory, which proposes that, as delivery systems become cheaper (iTunes, Amazon, etc versus big record labels and major retail stores), more market share will be captured by smaller artists.

I think there are two forces at play here. First, regarding the long-tail of digital music: Modern delivery systems likely do not nudge buyers toward top-sellers, at least no more so than archaic delivery systems. Sure, Amazon shows shoppers the top-sellers more than the niche items, but Amazon also knows something about users' preferences. I'm not sure that Amazon has ever shown me a Britney Spears or a Justin Bieber song to buy. That's probably because I don't buy that sort of stuff. I'm much more likely to see Wilco and Grant Green, because that's the sort of stuff I buy. In Olden-Times, Tower Records showed me tons of Madonna and Garth Brooks albums, probably because it had no mechanism to distinguish me from every other yahoo that wandered through the door. Thus, the modern delivery system encourages the purchase of niche titles, at least more so than the old system did.

As I said above, it's likely important to distinguish between homogenous and heterogenous goods and services. In the digital music marketplace, there are both homogenous services and heterogenous goods being sold. When I am shopping for music, I have many artists to choose from. No single one is objectively any "better" than any other; this is personal preference. As I argued in the last paragraph, niche (lower popularity) artists have a greater opportunity to be heard because barriers to entry are so low. On the other hand, Amazon provides a (more or less) homogenous service. Shoppers patronize Amazon because they are a good (easy, cheap, reliable) way to browse and buy music (and rare art, among other things). Amazon has captured much of the market because it is objectively better at providing the service it provides, than, say, whoever is selling music in brick and mortar shops in 2014. The same technology that allows the long-tail theory to hold for independent artists allows Amazon to vacuum up much of the market share in the provision marketplace.

It's not inconceivable that the winner-take-all hypothesis holds in situations where providers of goods and services can be roughly ranked from best to worst. On the other hand, if personal tastes and preferences are significantly material, there is no reason that the long-tail hypothesis cannot also be true.