Input price dynamics and niche proliferation in the creative industries

This thesis proposes an evolutionary model relating price dynamics in input markets to innovation and variety generation in output markets. While it is commonly assumed that falling prices of inputs to production are efficiently passed on to consumers as lowered prices (via the effects of competition in output markets), we often observe another effect, namely an increase in product variety. This thesis proposes that rather than cost advantages being competed away by incumbent firms the lowered input price induces a fall in the opportunity cost of entrepreneurial experimentation in the product and market space, leading to a proliferation of variety in output markets. In this case the market space of product designs expands which is akin to market segmentation or niche formation. Moreover, variety tends to increase not in the short-run, with marginal price change, but in the long run, accompanied by systematic price decline. The proposed mechanism connecting input price dynamics to variety (niche) proliferation draws this distinction between marginal and systematic price changes. Further, this thesis extends the input price-induced niche proliferation theory to the “creative” industries, which demonstrate this pattern particularly well. Therefore, this thesis is also about input price dynamics and the proliferation of genre niches in the creative industries. The genre proliferation hypothesis is tested empirically for the case of the music industry over the period 1947–2009, and patterns of input price dynamics in various other creative industries are presented as case studies (e.g. art, video game design, photography, fashion design, and film and television). On the whole, econometric modelling provides support for the hypothesis that musical input price dynamics drive experimental behaviour and the proliferation of new music genres. Further, results suggested that input price changes are the relevant driver of music genre proliferation, as opposed to the price level, and a measure of systematic price change was found to have a statistically significant negative impact on genre proliferation, as expected. This lends support the proposition that systematic, long run price declines induce variety proliferation.