Play it Again, Sam? Product Differentiation and Success in the Music Industry

Abstract

Newly released music by a certain artist is never assessed in isolation by the audiences, who tend to compare it with the previous musical catalogue of the corresponding artist. Through a repeated interaction with the artist's music, the audiences build their own expectations about the future releases which affect the overall market reception. In this paper, we provide a general framework that incorporates the dynamics of these references towards addressing the classical dilemma of incremental versus radical innovation. We develop a theory rooted in classical behavioral economics of reference-building, and consider preference structures of habit formation and satiation. We then empirically measure the response of audiences to different degrees of innovation in successive musical album releases, by using a multi-attribute musical description of songs, together with their corresponding radio plays and critics' reviews. We find that a median deviation of the musical attributes of the newly released album from the reference levels of the audiences reduces the plays of the newly released albums by 23.1%, while that of the past albums increase by 13.8%, supporting the evidence for the existence of habit formation over radio stations. On the other hand, critics display the effect of satiation with a median deviation from the reference levels resulting in an average increase of 14.9% in their ratings. Our counterfactual analyses demonstrate how these findings can be utilized to adopt appropriate innovation rates to tailor-make products that cater to the preference structures of target consumers.

Keywords: New Product Development, Incremental Vs. Radical Innovation, Reference Effects, Habit Formation, Satiation, Music, Cultural Operations

JEL Classification: M1