As you read in the chapter, the requirements for an industry to be considered monopolistically competitive are that there are many firms and those firms are producing unique, or differentiated, products. One industry in which we find differentiated products is the recording industry.
Not only are there many genres of music (iTunes lists almost 50), but within each genre there are countless artists as well. Over the past few decades, technology has reduced the fixed costs of recording and the marginal costs of distributing music.
In 1979, for example, the average studio bill for an album was more than $30,000 ($170,000 in today's dollars). Nowadays, with digital recording technology, an artist or band can record an entire album for a few thousand dollars and the album can be distributed at low cost as MP3s on the Internet, with no record store involved.
a. What do you expect to happen to the music industry because of the evolution of much cheaper recording technology? What do you expect to happen to the number of recording artists?
b. Suppose there are initially only two recording artists in all of the record industry: the Decemberists (an indie rock band) and Yo-Yo Ma (a famous cellist). How many MP3s will they each be able to sell? Who would buy MP3s from the Decemberists? What about from Yo-Yo Ma? Will anybody buy MP3s from both?
c. Now suppose that another artist joins the industry: Isobel Campbell (an indie rock cellist!). What will happen to the demand curves for MP3s that the Decemberists and Yo-Yo Ma face? Will they keep all of their fans? Will they keep any of their fans? What do you think will happen to the total number of MP3s sold in the industry?
d. Generally speaking, as technology makes it cheaper and cheaper to produce MP3s, and as more and more bands join the music industry, what will happen to the total number of MP3s downloaded by music fans? What will happen to the MP3s sold by each individual band? What will happen to the profits of each band?