Tag Archives: economics

The Economics of Cover Charges

pettibon collage shirt
“Let’s raise the price at the door. How much tonight? Three thousand or four?”

Today’s post is inspired by a friend who got into an internet tussle over cover charges in his local music scene. I discovered that there wasn’t enough good writing on cover charge economics, so I give you the following:

Touring bands have contacts that they insist on and that agents push get clubs and promotors to sign because they need to finance the tour somehow. They need income and they need to avoid prospective costs; e.g., van breaks down and they have to crash in a hotel for three nights while it gets fixed. They’re certainly not getting rich either but they actually have to get paid to make it to the next city and eat etc. So naturally touring bands charge more for their shows.

Local bands are different because all their costs are sunk costs. The rent on the practice space, the gear, etc. — it’s all paid for by the time you get up on stage. So it’s your choice: you can charge $12, or $7, or $5 (if you really have nostalgia for 1983), or $0.

I think the fundamental assumption one must make is that most local rock musicians are hobbyists and thus irrational actors who are going to play no matter what. The price at that point is just a symbol that you put on something and for whatever nostalgic, and not economic, reason, many people in the independent music scene have seized on that magical $5 figure.

Anyone who is not on welfare or committed to going out 7 nights a week can afford $2 more. The idea that an average person with a job who can’t afford an extra $2 is a framing effect — a great example of cognitive bias. 

Someone who thinks that the extra $2 ($0.84 in 1983, by the way) is not affordable suffers from loss aversion — the commonly held perception that it’s worse to lose something than to gain something. (That is, that most people would rather get $2 discount than avoid a $2 charge.) In this case, the haters are averse to losing the extra $2 in their pocket and don’t realize that they gain more quality local rock.

The rational economic actor and hobbyist rocker in this case should then ask the bar to charge a $7 cover and then give everyone a drink ticket for a $2 beer.

The Trap

I first encountered Adam Curtis via 2004’s The Power of Nightmares, which I watched while I was a graduate student. It was an interesting and provocative thesis — that the rise of the neocons had a parallel in the rise of radical Islam, and that both were based in the politics of fear. His style of film collage, often heartily ironic, mixed with unadorned interviews, fit the subject matter well. More than anything I appreciated his quest to see big-picture issues — something rare for the political commentator, who tends to get bogged down in details.

I was excited to have the chance to watch 2007’s The Trap this weekend, another three-part series for the BBC. The unlikely threads he traces here are even more ambitious than those in The Power of Nightmares — and accordingly, are sometimes more tenuous. All the same, the similarities he sees between game theory, pharmaceuticals and the DSM, performance targets in government, and Isaiah Berlin’s famous distinction between positive and negative liberty are fascinating, and those are just the bigger issues he touches on.

Initially I disagreed with his characterization of John Nash. I didn’t like the way that he played up Nash’s schizophrenia and played down the rigor of game theory. As anyone who’s every struggled through a game theory problem set knows, it’s a challenging discipline and not merely Cold War paranoia. Nash comes off badly in the first episode but Curtis is more sympathetic towards him in the second, when he admits that the assumptions behind the actors in game theory — that human beings are necessarily always totally rational and coldly self-interested — is flawed.

The greater problem is that this assumption is not limited to merely game theory but is common to all of modern economics. Curtis seems to place the origin of the modern era’s increased control and anxiety squarely on the shoulders of this limited understanding of the human condition. I think most practicing economists realize that the model of human beings as mechanistic and calculating is just that — a model. As Curtis glibly points out, no out actually acts this way, aside from economists themselves and psychopaths. But that’s a shortcoming of a science that tries assiduously to measure utility, the quantification of which has been contentious since the days of J.S. Mill and Jeremy Bentham. It’s an imprecise science that deals with data precisely.

The problem, I’d argue, is when political leaders base all of their actions on this admittedly limited model, assuming that the model of human beings that it presents must be as rigorous as the methods with which it treats datasets and trends.

At any rate, it’s a fascinating film that tries to cut to the big-picture issues of what ails us in the modern era. Most filmmakers and TV producers skirt such diagnoses. Other 20th-century giants that get an interview include Friedrich von Hayek, James M. Buchanan,Thomas Schelling, R.D. Laing, Malcolm Muggeridge, Jean-Paul Sartre, Frantz Fanon, Alexander Haig, Samuel P. Huntington, Francis Fukuyama and Jeffrey Sachs. How can you go wrong with a cast like that?

If that’s not enough of a sell, pop addicts should like the soundtrack which features Yo La Tengo, Brian Eno, Morricone, LCD Soundsystem and music from the Godfather, as well as Shostakovich and Sibelius.

Finally, for those interested in Italy, Paul Ginsborg has correctly identified the kind of liberty that the current prime minister is always going on about as Isaiah Berlin’s negative liberty.  The third episode is all about how negative liberty has been appraised and unleashed in Britain, America and the rest of the world, so it deserves a careful study.