Analytical Models in Entertainment and Media
Creators: Kim, Yena Stephanie
Publisher: name: Columbia University
Year: 2015
Subjects: subject: Marketing
subject: FOS: Economics and business

description: The entertainment industry is a highly competitive and risky business with only few successes. The ways in which we experience music, movies, games, books, and television in our lives have changed significantly in the past few decades, depending more on people's experiences. As these mainstream forms of entertainment are experience goods, it is hard to measure the value and fit of the product before trial. Thus, it is important for the entertainment industry to effectively engage and captivate the target audience by seizing their positions and by anticipating the consumer needs ahead of time. This demand-side challenge is coupled with challenges on the monetization side; specific pricing strategies may encourage consumers to engage the product early, reinforcing social dynamics that lead to eventual adoption by many. This dissertation consists of two essays that explore these commonly found challenges in the entertainment business. The first essay is focused on understanding the social dynamics underlying the blockbuster phenomenon. The second essay concerns the widely used ``freemium" pricing strategy by electronic content providers and digital publishers. 
      The first essay ties the social dynamics of consumers to the blockbuster phenomenon commonly found in the entertainment industry. The market for the entertainment industry is dominated by limited number of blockbusters capturing disproportionately large shares of sales and revenues (also known as the `Murphy's law'). These blockbusters get revealed relatively early but are also extremely hard to predict before launch. Many have tried to explain sales and revenues with industry characteristics, such as the presence of stars, budget, and reviews and ratings; however, only few have addressed the role of social dynamics in the entertainment business. We specifically study the effect of social influence on different stages of the decision making process---the consideration set formation stage and the choice stage---and relate it to the empirical findings on blockbusters. Specifically, we propose two agent-based social observing models depending on when consumers learn about previously made choices during the decision making process. We find that social influence in the choice stage leads to a distribution of market shares that is highly skewed with a long, heavy tail. Also, success and failures are revealed early in the tenure only when social influence is present. However, the underlying behavior of consumers depend highly on when the social influence is present during the decision making process, the type of the information about others' choices. and the number of alternatives in the market. 
      The second essay studies the optimal design of a freemium pricing strategy. Many web-enabled services (e.g., Hulu), digital games (e.g., Angry Birds), and applications for tablet computers and smartphones (e.g., Merrian-Webster dictionary) are available in both free and premium versions. Under the freemium model, a firm provides some portion of the product for free, but a premium is charged for advanced features, functionality, or virtual goods. We specifically examine the optimal quality in the free version, the amount of advertising to be shown in the free and paid version, and the price to charge for the paid version when a firm adopts a freemium pricing strategy. We consider a two-stage consumer adoption model in which consumers first try the free version and then decide whether to buy the paid version. Adoption depends on the quality and the rate of advertising. The firm earns advertising revenue from the free and/or paid versions, which depends on the duration of usage of the game, and sales revenue from the premium version. The analytical results suggest that profit maximization does not maximize the switching rate from the free to premium versions. It is optimal to give more for free than is needed to maximize the switching rate for greater demand and advertising revenue. The optimal price is higher when only the free version has advertisements compared to when both versions show advertisements. When consumers are price sensitive, the firm has the incentive to increase the quality and decrease the rate of advertising in the free version, and to decrease the price of the premium version.