Sunday, January 26, 2014

Eye on the prize

Prizes are a common feature on the cultural economy landscape.  In Australia there is the famous Archibald Prize for portraiture, there are numerous prizes for literature and poetry, the AFI Awards in film and television, the Walkley Awards for journalism, and so on.

Prizes can be entertaining spectacle;  they can guide consumers to what is new and best;  they make a fine vehicle for a generous benefactor;  and they surely nudge cultural producers, whether they will admit it or not, closer to excellence.  Yet a case can be made that, due to the interaction of three emergent effects, we'd actually be better off without them.

First, prizes function for consumers as what sociologists call ''judgement devices''.  An overarching feature of the cultural economy is the continuous production of novel products that are of uncertain quality:  they are pure experience goods.  In most markets, such as for furnishings, shoes or cars, the price of a product is a reliable guide to quality.  But an awful movie has much the same ticket price as something brilliant.  A few years ago some colleagues and I looked at the role of the choices of other consumers as a judgement device in what we called social network markets.  Prizes also fulfil this role, but through the mechanism of an expert panel rather than wisdom-of-crowd effects.

Second, prizes introduce a discontinuity between winners and other nominees (also-rans) that distorts perceptions of underlying differences in quality:  consecrating a select few, and throwing the near winners back into the vast pools of mediocrity.

Third, because prizes are awarded by juries of experts — usually with different tastes and preferences than mass audiences (preferring stories about righteous courage in overcoming historical injustice, say, than street-racing robot fighting aliens) — prizes are costly to go after in terms of market risk.  If you try and fail, you end up with not only no prize, but also with something without much market appeal.

When we think about the effect of prizes, we usually have in mind a single-valued reward structure — that is, simply rewarding excellence that has already happened.  But as Gabriel Rossman and Oliver Schilke in a paper just published in the American Sociology Review (an ungated version of the paper is available here) explain the problem is that prizes are actually bimodal in their reward structure because of what economists (following the work of Gordon Tullock) call an all-pay auction.

In an earlier piece I was bullish on prizes, but the issue is complex.  The thing about prizes is that we need to consider not only the benefits to those who win, but also the costs to the losers.  Everyone pays to enter, in sacrificing market appeal, but only a few take the prize, and receive the consumer pay-off;  for the rest, they're now in a worse position than if they had never sought the prize.

Fittingly for this time of year Rossman and Schilke's research focuses on Oscar nominated Hollywood films.  Their method is to identify films that are seeking prizes by constructing and estimating an index they call ''Oscar appeal'' (which correlates well with actual Oscar nominations).  They then study the correlation between that index and a film's financial returns (box office revenues divided by production cost).

They find that Oscar appeal splits into two categories:  those that do receive nominations (and that tend to make money) and those that don't receive nominations (and that tend to lose money).  But the interesting thing is that ''taken together these two types of movies are no more or less profitable than movies with low Oscar appeal''.  In econ-speak, this means that ''the Oscars follow the structure of a Tullock lottery and seem to exhibit rent dissipation.''

Economists tend to be sceptical of the value of artificially created rents by government, such as exclusive licensing, or preferential purchasing provisions, because of rent-dissipation in all-pay bidding to obtain these benefits.  But what is significant about this research is that it extends this economic critique to the domain of prizes, which are a prominent mechanism in the cultural economy (and also in the academic research economy:  a research grant is also a prize!).

Should we abandon prizes?  The counter-factual world without prizes would mean fewer prize worthy films, which means less breadth in the field, but this only occurs if prize-seeking is actually costly in terms of market risk.  The take-away is simply that nothing is for free, including prizes;  or more specifically at the industry level that prize seeking strategies do not produce above-market returns.


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