Intellectual Property and Monopsony

Joseph and I seem to be on a binge (purge?) of intellectual property posts, collecting piles of facts and observations on the subject. Somewhere in one of those piles we need to make room for the concept of monopsony.

From Wikipedia:

In economics, a monopsony (from Ancient Greek μόνος (monos) "single" + ὀψωνία (opsōnia) "purchase") is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.

In entertainment, the norm is to have a huge number of artists trying to sell their products or services to a small number of buyers. Not only are there few buyers but access to these buyers is tightly controlled. The result can be an effective monopsony.

The results can look like this:

CrazySexyCool eventually sold over 11 million copies in the US, and became one of the first albums to ever receive a diamond certification from the RIAA,^[12] and won a 1996 Grammy Award for Best R&B Album and a 1996 Grammy Award for Best R&B Performance by a Duo or Group for "Creep".^[6] However, in the midst of their apparent success, the members of TLC filed for Chapter 11 bankruptcy on July 3, 1995.^[16]

They declared debts totaling 3.5 million dollars, ... the primary reason being that each member of the group was taking home less than $35,000 a year after paying managers, producers, expenses, and taxes.

Here the New York Times spells out some of those expenses:

The arithmetic is simple and sobering for aspiring stars: The average wholesale price of compact discs and cassettes is about $8 a unit. Thus, an artist with a 12 percent royalty rate, which is typical, gets about 96 cents per unit, or $480,000 on a "gold" record. From that, the record label recoups a portion of its advances to the artist for recording costs, music video production, tour support, independent promotional efforts, limousine services and so forth -- often as much as $170,000.

In other words TLC, which was only getting a seven percent royalty rate, was paying for pretty much everything, including a million or so just for the video for "Waterfalls."

The history of popular entertainment is filled with examples of creators selling million (sometimes multimillion) dollar properties for the equivalent of kind words and PEZ. This is not something you find in an efficient market.