#SupplyDemand: It’s all a matter of perspective

Ok, I can’t resist. I know you haven’t heard from me in months and months (I survived an 80 day trip around the world btw! More on that coming soon), but I wanted to submit a few thoughts on the #supplydemand discussion inspired by this talk by NEA Chair Rocco Landesman (note that this particular discussion begins around 42 minutes in, and is mentioned several times again later).

A Few Graphs (don’t be scared!)

Not to get too technical with the supply & demand discussion, but the only thing we find where supply meets demand is a relationship between price & quantity, and even that axiom has a significant number of qualifiers. We’ve (hopefully) all seen a supply and demand graph — where quantity is along the horizontal axis, and price along the vertical axis, a supply curve (generally) slopes upward, and a demand curve (generally) slopes downward. Where the two meet (in theory) determines how much of anything is produced & consumed, and at what price.

When supply in the market increases, competition forces price to drop and more people are willing to purchase the product at this lower price. When demand in the market decreases, suppliers are forced to lower the price but still attract ever fewer buyers. Put these two shifts together, and (assuming the slope of your lines are inversely proportional, and the relative shifts in supply & demand and equivalent), you get the same amount of product produced & consumed as before, but at a lower price. Which most consumers, for most products, agree is a good thing. That price will continue to fall until it reaches the marginal cost of production, the lowest price at which a supplier can afford to offer its products and stay in business.

Where things get wonky is when those slopes aren’t inversely proportional, and the shifts aren’t equivalent. Which, I believe, is precisely what we’re talking about. When we talk about artists being willing to “supply” theatre, regardless of what it costs them to produce, in economic terms that means the supply curve is more inelastic (or more vertical). I think we can also agree that supply has increased faster than demand over the past few decades, meaning the shift of the supply curve is larger than the shift for the demand curve. And for sake of argument, let’s assume that while the total quantity of theatre demanded has decreased, the average consumer who demanded theatre previously, demands it just as much now; and let’s assume that while the total quantity of theatre supplied has increased, the propensity for a theatre company to supply art regardless of how much it costs them hasn’t changed. Then our graph looks more like this:

So now there is *more* theatre being consumed, but at a much much lower price point than before (a point I’ll dispute in a moment). An objective bystander watching this changing market might be concerned that the quality or the nature of the product will change because of the decrease in price.

In a market economy, this change could have several impacts, the most likely being that the change in price drives out some of the suppliers who can’t produce at that price, which shifts the supply curve backwards, which pushes the price back up, and stabilizes the market. From the perspective of a SUPPLIER in the market, the problem for the arts economy is that they are “having to” produce more theatre at a lower price point, thereby requiring more support income (a problem for a DONOR like the NEA). But from the perspective of a BUYER in the market, more quantity at a lower price is a good thing.

And therein lies the rub. When the only people in the market crying for more product are the suppliers, you’ve got a problem.

A Historical Arts Perspective

My problem comes from the fact that ticket prices haven’t been falling. According to the TCG Fiscal Survey Trend Theatres from 1997–2009 and the inflation calculator, average ticket prices have actually far outpaced inflation. This doesn’t even take into account that it’s highly likely that TCG has obtained data from ever smaller trend theatre companies over the past 12 years (and so the average ticket price increase at a single theatre is likely significantly larger than this graph implies).

In other words, the players in our market aren’t behaving rationally. They’re charging more and more even as fewer and fewer people are attending their shows. But of course they are — because ticket price is only one side of the equation. The other side is donations. If a theatre can subsidize its price in the market with donated income, then they can, if they so choose, offer a price below their marginal cost of production.

It seems to me that we have a price/cost problem. Over time, the price of some types of products tend to fall, mostly due to advances in producing them more efficiently: think of the cost of a computer ten years ago versus today. The price of other products tend to rise over time, mostly due to either their perceived worth (oil), or their cost of production increases (healthcare services). By and large producing art looks more like healthcare services than oil or computers. In fact, among TCG trend theatres in the Fiscal Survey reports, we’ve nearly doubled how much we spend per evening’s performance in the past 12 years.

So are costs rising because wages are increasing? Well, the wages for some at least: note how that red line outpaces the blue line in 2004.

It gets worse. The average attendance per performance has also significantly decreased (with a caveat mentioned previously, that trend theatres are likely smaller now than they were 12 years ago).

Bottom line: we’re spending more money each night for fewer people to attend the theatre. So of course our theatres have increased their prices — they can’t afford not to. Unless some of these variables start to change.

Some Tough Choices

In the end, I’m in agreement with Rocco.

If there were less supply, each theatre would have a larger audience, (not to mention that the NEA would have an easier time doling out money), thereby providing more opportunities to be financially stable. So who’s going to decide which theatres have to go? Two choices: donors (be they individual or institutional) who refuse to be a stop-gap for failing companies, or the companies themselves, who realize they help the arts economy more by shutting down than by limping along.

If there were more demand, theatres could take more financial and artistic risks. If there were fewer arts administrators (and/or if fewer people chose to become artists), we could afford to/be forced to pay artists living wages. So how do we increase demand? There are 3 options, increase the:

• Desire to purchase the product (so we have to make “better” theatre, or convince people the arts are worthwhile for reasons other than pure entertainment)
• Ability to purchase the product (if we assume the reason more people haven’t purchased is because they can’t afford to)
• Willingness to pay for the product at the price offered (IOW, “market” our way out of this hole)

As Rocco mentioned in his follow-up, arts education seems to be helpful in increasing the desire to purchase. I would be inclined to lower ticket prices (thereby increasing the ability to purchase), if only we could find evidence that this would indeed increase attendance. I’m highly doubtful that raising ticket prices will solve the equilibrium price/quantity problem.

A Possible Future

Let’s imagine an incredibly simplified version of some mythical future arts economy. What if:

• Every theatre company performed one show every night of the year
• Every theatre space had 200 seats and was filled to capacity every night
• There existed 300 million people of theatre going age (a number loosely based on this graph, adjusted for population growth)
• Every person went to the theatre on average 3 times per year (which is about half as often as they go to the movies currently)

There would need to be 1 theatre for approximately every 25,000 people. So New York City would have about 350 theatres. Chicago would have about 120 theatres. Austin would have 30 theatres. And yes, even Peoria would have 5 theatres. That doesn’t sound so bad does it?

Of course, this simplification doesn’t say anything about price or cost — just quantity. It could be the case that producing in a 200 seat theatre would be less cost effective than producing in a 400 seat theatre. Is it realistic to believe theatre-going could be half as popular as film-going? Is it realistic to believe we can significantly decrease average theatre size? Is it realistic to believe we could ever equally disperse theatre activity? And oh by the way, that would also likely increase the average cost of production. Newspapers are dying while journalism and consumption of news thrives because it turns out there are legitimately good alternatives to the news in physical form. Are there good alternatives to the theatre?

I don’t know.

But decreasing supply doesn’t necessarily mean decreasing the number of theatre organizations.

And “solving” the supply/demand equilibrium could depend as much on price (what I’m willing to pay) or cost (what you are able to produce at) as it does on quantity.

I want every American to have access to high quality theatre. I want there to be a diverse theatre ecology, one in which competition forces creative exploration rather than economic instability. I don’t think I want anything else, but maybe you can change my mind.

PS: Don’t have ANY IDEA what I’m talking about? Check out:

• Trisha Mead documenting the moment, and later arguing for arts as an R&D model
• Clay Lord on being a victim of our own ubiquity
• Adam Huttler on worshiping the cult of the eternal institution

UPDATE (Feb 7):

Worth your while to check the comments & responses on this post.

Aaron Anderson’s post inspired me to dig up some new numbers & graphs:

Performing arts nonprofit organizations operate in at least three markets: markets for what people will pay to see them perform, the financial markets for debt, investments and endowments (do not apply to all organizations, and are not further discussed here), and the markets for private philanthropy and status. Markets for philanthropy and status are almost entirely missing from the demand side of Rocco’s equation (and the demand side of [the] traditional economic analysis by Devon Smith).

Ah, but the value of the philanthropic market should already be priced into the model of the ‘ticket’ market. After all, “ceteris never stays paribus” so as donors increase or decrease their funding levels, so too should the price of tickets change and/or the quantity/quality of product. Let’s take a look at the numbers, again, from TCG Trend Theatres Theatre Facts:

Both expenses and contributed income are outpacing inflation, although it looks like expenses are a bit more volatile, and have risen a tad bit more than contributed income. In any case, we might want to ask ourselves: How does the supply of contributed income match up with the demand for that income by institutions?

Now there’s a graph I’ve never seen before. In theory, based on TCG trend theatre averages (which, by all means I know, averages hide a huge range of variability in the data and are kind of terrible to use in big industry overviews like this), nonprofit theatres seem to be running at about a 10% profit margin. In other words, over the past 13 years, theatres should have managed to cover annual expenses, and re-invest that 10% in bettering the organization.

But back to your point Aaron, we do in fact see the market for contributed income rising and falling in response to changes in ticket sales. But if demand for the arts is demonstrated through contributed income, I hardly think we’re seeing an abundance of the demand.

What no one (or at least few) is disputing:

• There is more institutionally-created art than there used to be
• Few, if any, theatres have either ticket-buyers or donors knocking down their doors, desperate to get in
• All combined sources of funding aren’t currently able to sustain the current cost of all that product at the current level of demand
• The result of these three mean that unless something changes, institutions are bound to fail sooner rather than later

The question remains what do we do about it.

Rocco offered a supply-side solution: decrease the number of institutions. He seems to imply that we could do this be allowing more institutions to fail. Because if artists will always have an incentive to make more art, and administrators will always have an incentive to create bigger budgets, and ticket-buyers have already made their opinion known through this demonstrable decline in ticket sales, the only players left in the market are the donors.

So one last quote & response

Further, the root of oversupply, if it exists, is in artists insisting on supplying more of their generative work to their communities.

The root of the supply/demand issue, if it exists, is in the art-making community insisting that donors (in this case specifically the NEA) continue to subsidize an ever-greater portion of a market bubble.