September 2012

There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.

The primary claim of critics such as the American Antitrust Institute and Public Knowledge is that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.

For market concentration to raise serious antitrust issues, products have to be substitutes. This is in fact what critics argue: that if UMG raised prices now it would be undercut by EMI and lose sales, but that if the merger goes through, EMI will no longer constrain UMG’s pricing power. However, the vast majority of EMI’s music is not a substitute for UMG’s. In the real world, there simply isn’t much price competition across music labels or among the artists and songs they distribute. Their catalogs are not interchangeable, and there is so much heterogeneity among consumers and artists (“product differentiation,” in antitrust lingo) that relative prices are a trivial factor in consumption decisions: No one decides to buy more Lady Gaga albums because the Grateful Dead’s are too expensive. The two are not substitutes, and assessing competitive effects as if they are, simply because they are both “popular music,” is not instructive. Continue reading →