Spotify case

Spotify has added over 20 million subscribers in the past year despite keeping its subscription prices the same.

Major divers of demand for Spotify’s subscriptions

According to Amadeo (2019), there are five major drivers of demand, including income of customers, price of the goods or service, price of related goods or service, expectation and preferences of consumers. In the case of Spotify, the very first driver of demand is cost of substitute product because customer can listen to a song in Spotify at much cheaper price than purchase a CD.  For instance, a subscription a younger Mexicans paid $10-$20 for a CD that contain one or two dozen songs maximum, only need to pay $5 to get access to Spotify and listen to 30 million songs. Therefore, it is rational for customers to change from listening to music from CD, to listen to music from Spotify, which offer better value at lower price. Secondly, preference of customer was also an important driver of demand. As it was mentioned in the article, massive growth in number of subscribers of Spotify in Mexico was not forecasted and prepared by the company. The reason is Latin America have half of population under the age of 30, who are major target customers of Spotify, middle class is expanding, which mean people could expense more for their entertainment activities and last but not least, Latin market customers are radio-driven, which is match with Spotify very well. Analyst Mark Mulligan further added that the establishment of Spotify as an aspirational and premium brand is key to success in Mexico.

a)     Supply side factors influence success of Spotify

In supply side, the success of Spotify could be explained as supply curve shift to the right, which lead to significant increase in demanded quantity as price per unit decrease and equilibrium point move along the demand curve. Firstly, technology innovation that enabled customers to listen to music from an app on smartphone significantly reduce the cost of providing the service as well as increase the number of songs that customer could access. In comparison with 10-20 songs in a CD, now customers can choose from list of 30 million songs on Sportify. Secondly, the input price or cost of operation decreased as supplier need much less cost to provide customers with music service. It was mentioned that only 90 employees of Spotify are working for customers in Latin America, about 20% of total customers.  Therefore, in the market of listening to music or music service, the supply curve shifted to the right due to technology change and decrease in price input.

b)     Cross-price elasticity of demand and example

According to Busterna (1997), cross-price elasticity of demand refers to the responsiveness in price of a good in response to changes in price of the other goods, which is the percentage ratio of change in quantity demanded one good to the change in price of the other good. In case of Apple and Spotify, it is clear that Apple music is substitute good to Spotify. Therefore, increase in price for Apple music subscription will lead to increase in demand of Spotify.

For example, if price of Apple music subscription increase by 10% lead to 15% increase in demand of Spotify in the same market, the cross-price elasticity of demand between Apple and Spotify equal change in quantity demanded over change in price = 15%/10% = 1.5

Taylor Swift boycotted Spotify for three years from 2014 until 2017.

Impact of top musicians’ boycott on Spotify’s competitiveness

The refusal of broadcasting on Spotify of Taylor Swift and other top musicians lead to decrease in competitiveness of Spotify because it reduces the attractiveness of the music service that they offer. According to Hernandez (2014), Taylor Swift had 19 million fans on Spotify. Therefore, as she boycotted Spotify, utility of at least 19 million customers reduced as they were not satisfied with Spotify like before. As economic theory suggested that consumers attempt to maximize utility or satisfaction within budget constraint (Yaari, 1965), the competitiveness of Spotify in the market reduced because customers will seek for competitors within the same service and price.

In addition, if consider that Spotify is a market, in which musicians are sellers, the boycott of Taylor Swift equal with reduce in number of sellers, which cause the supply curve to shift to the left. As a result, with no change in subscription fee, customers actually paid higher for a song than before.

Impact of Taylor Swift’s termination of boycott.

As it was mentioned in previous question, as boycott of Taylor Swift considered as reduce in number of sellers and cause demand curve to shift left, her return on Spotify equal with increase in number of sellers, which cause supply curve to shift right. From the graph, it can be seen that when Taylor Swift boycott Spotify, the Supply curve shift left and equilibrium point was at E1. However, as she removes the boycott, new sellers added into Spotify market and cause the equilibrium point change from E1 to E2, back to the original place.

Adidas case

Adidas and market structure

Market structure and main competitors

As it was mentioned in the news article, Nike is the main rival of Adidas which dominated the UK market. However, besides Adidas and Nike, there are several sportwear brands like Under Armour, Puma, the North Face, etc. Moreover, competition in the sportwear market is not purely in term of price while it is not likely that companies in the market could collaborate to act as monopoly. The freedom to enter the market is high and companies tried to differentiate their products. Consequently, the market structure of US sportwear market could be defined as monopolistic competition.

Effects of celebrity endorsers on equilibrium price and quantity of product sold

The standard consumer model that is widely used by economist assumes that consumers always rank options in accordance with personal preferences and always choose to want they like best (). Therefore, by having celebrity endorsement, Adidas can tap on the personal preferences of customers to be ranked 1st in their list of choice. As it was also mentioned, positive change in consumer taste could shift the demand curve to the right, thus, increase the demanded quantity and increase equilibrium price.

In term of competitiveness, Fujita (1988) mentioned that in monopolistic market, companies compete with each other by differentiating their products. Therefore, besides differentiation in design and material, endorsement of celebrity also causes products of Adidas to be differentiated with rivals’ products.

The article states that Adidas increased its investment in digital warehousing to boost sales.

Aggregate demand impacted by increase in investment of company

According to the Keynesian analysis, aggregate demand equal sum of government spending (G), Investment (I), consumption (C) and net import export (EX). Therefore, in the case of Adidas, increase in investment of Adidas as well as other companies in market lead to increase in aggregate demand, which shift the aggregate demand curve to the right.

Simply stating, increase in investment lead to more job created, not only in Adidas but also in companies that supply the digital services and products to Adidas. Moreover, to keep competitive advantage, rivals like Nike, Puma or Under Amour will also invest in digital solution, which further enlarge the impact of Adidas’s investment. As more jobs created, it is rational to assume that the unemployment rate would decrease and the aggregate income of household increase. With all other factors remain constant, increase in income would definitely lead to increase in consumption and aggregate demand curve will shift to the right. As a result, new equilibrium point will move along the aggregate supply curve, from E1 to E2 while price increase from P1 to P2. In general, increase in investment of company like Adidas, Nike and large competitors lead to direct increase in investment and indirect increase in consumption.

Potential macroeconomic risks of such continuous increases in investment.

As it was mentioned and illustrated in previous part, Investment lead to increase in income of customers, thus, indirectly lead to increase in consumption. However, the graph indicated that as the demand curve shift to the right, the equilibrium point moves up along the aggregate supply curve, to E2 position, which feature higher product price and higher quantity of demand. This phenomenon is inflation.

In short run, this phenomenon lead to increase in quantity of supply as company produce more product to meet increase in demand. However, in long-run, economist believed that the aggregate supply is a perfect vertical line, which can only by shifted by technology innovation that reduce production cost (Tarshis, 1979). Therefore, without technology innovation or other factors that cause the long-run aggregate supply to shift to the right, increase in income of customer only cause the equilibrium point to move up along the short run supply curve. As price continue to increase, increase in consumer’s income could not meet with increase in price, customer would start saving and choosing lower price products, cause aggregate demand to shift left. Because sellers could not change their production or business plan immediately as consumer, there will be surplus in the market, which cause loss to sellers. Consequently, many sellers could go bankrupts or downsizing and increase in unemployment rate. Ultimately, it lead to decrease in income of consumers, decrease in consumption and further shift the aggregate demand to the left.

In other word, continuous investment without control will lead to bubble or unstable growth of the economy. Without sustainable development, Aggregate supply remain unchanged and investment will only lead to increase in price or inflation and economic crisis when the economic bubble burst.

Macroeconomy

US real personal consumption vs real gross domestic product analysis for period from 1995 to 2018.

Trend analysis and comment with focus on recession periods

Overall, from 1995 to 2018, both real gross domestic product value and real personal consumption value increase gradually every year, except 2008 and 2009. However, the percentage of growth is higher in real personal consumption, which increase from $6910 to $12,887 (186%) while real Gross Domestic Product growth was just 174% (from $10,543 to $18,324). In which, Gross Domestic Product decreased by 525.443 in 2009 while real personal consumption decreased 22.507 in 2008 and further decrease by $132.867 in 2009. In other word, real personal consumption decline before Gross Domestic Product decline.

Connection between Gross Domestic Product and real personal consumption

Through the graph, it is clear that there is positive correlation relationship between real gross domestic product and real personal consumption because both indicated similar trend throughout the period from 1995 until 2018. Therefore, it is possible to assume that there is connection between gross domestic product and real personal consumption in the United States.

Firstly, the connection could be explained by the formula or definition of gross domestic product which is the sum of personal consumption expenditure, government expenses, investment and net of import and export activities (Johnsson, 2002).

Gross Domestic Product = Consumption (C) + Government Expenditure (G) + Investment (I) + Net export – import (NX)

Based on the formula of gross domestic products, which equal C+G+I+NX, increase in gross domestic products indicated increase in all or each of components. However, real personal consumption contribute 66-70% in the gross domestic product of the United States, it is clear that increase in gross domestic product could be directly explained as increase in personal consumption. According to the United States Bureau of Economic Analysis (2008), personal consumption expenditure measures the prices that people in the United States pay for goods and service that they purchase or purchased on their behalf. Therefore, the real personal consumption indicates living standard of people in the United States as well as their purchase power. Data from FRED indicated that the real personal consumption contributed 66% to GDP of the country in 1995 but gradually increase and reach 70% of GDP in 2018, which suggested that throughout the period, living standard of people increase and consumer could afford higher consumption. From economic point of view, increase in real personal consumption can only be explained by increase in income of consumer in the market. In other word, from increase in personal consumption, it is rational to assume that from 1995 to 2018, there is significant increase in income of consumer, which shift the aggregate demand curve to the right. Thus, the gross domestic product and real personal consumption influence each other. The higher the gross domestic product, the higher the consumption power and vice versa.

Impact of increase in Gross Domestic Product on Spotify and Adidas

As it was explained in previous part, increase in gross domestic product equal increase in personal consumption. Therefore, increase in gross domestic product lead to increase in the power of consumption or the spare budget to consume of personal customers. It is noteworthy that increase in customer’s power of consumption is not increase in price of product. Therefore, from economic point of view, increase in GDP cause the aggregate demand curve to shift to the right. Consequently, quantity of demand increase and products could be sold a higher price as equilibrium point move up in the supply curve.

However, in long-run, high price lead to entry of new sellers, to gain benefit from high price. Thus, both Spotify and Adidas need to compete with more competitors in the market. Therefore, in long-run, the price will fall back to the original equilibrium point or even drop to lower level if sellers provide surplus of products and services. For this reason, in order to avoid the war price with new sellers, both Adidas and Spotify need to crease sustainable competitive advantage. In case of Spotify, the company could develop new function or app that target different customers group or expand to new market. Similarly, Adidas could find new market or produce products that separated from its core sportwear items, such as perfume. Ultimately, it is clear that increase in gross domestic product lead to increase in demand in short run but force companies like Spotify and Adidas to change their business strategy and create sustainable completive advantage to survive in a fiercer competition.

References

Amadeo, K. (2019). 5 Determinants of Demand with Examples and Formula. [online] The Balance. Available at: https://www.thebalance.com/five-determinants-of-demand-with-examples-and-formula-3305706 [Accessed 9 May 2019].

Busterna, J.C., 1987. The cross-elasticity of demand for national newspaper advertising. Journalism Quarterly, 64(2-3), pp.346-351.

Fujita, M., 1988. A monopolistic competition model of spatial agglomeration: Differentiated product approach. Regional Science and urban economics, 18(1), pp.87-124.

Hernandez, B. (2014). Taylor Swift removes all music from Spotify after ‘1989’ bickering. [online] Mashable. Available at: https://mashable.com/2014/11/03/taylor-swift-removes-music-spotify/ [Accessed 9 May 2019].

Johnsson, R.C., 2002. Why the GDP Shows No Bust, But GDR Does. University of Uppsala, Sweden.

Tarshis, L., 1979. The aggregate supply function in Keynes’s General Theory. In Economics and Human Welfare (pp. 361-392). Academic Press.

Telser, L.G., 1995. The ultimatum game and the law of demand. The Economic Journal, 105(433), pp.1519-1523.

United States Bureau of Economic. (2018). Personal Consumption Expenditures Price Index | U.S. Bureau of Economic Analysis (BEA). [online] Available at: https://www.bea.gov/data/personal-consumption-expenditures-price-index [Accessed 9 May 2019].

Yaari, M.E., 1965. Uncertain lifetime, life insurance, and the theory of the consumer. The Review of Economic Studies, 32(2), pp.137-150.