Taylor Swift, look what you made fans buy

Taylor Swift released 27 versions of her 2025 album The Life of a Showgirl. That sounds excessive, but it offers a nice lesson in economics and pricing strategy, specifically price discrimination.

Price discrimination occurs when a firm charges different prices to different groups of consumers for the same good or service, and where the price differences do not arise from a difference in costs. One form of price discrimination is 'versioning', where the firm offers different versions of a product that each cost the same to produce, but which appeal to different groups of consumers (with different price elasticities of demand). Consumers that are more price sensitive (and have more elastic demand) would buy the version of the product that is less expensive, while consumers that are less price sensitive (and have less elastic demand) would buy the more expensive version.

We saw an extreme example of versioning last year, executed by the astute economist Taylor Swift. Paul Crosbie (Macquarie University) wrote about it in this article in The Conversation last October:

The Life of a Showgirl was released in dozens of formats, with physical and digital editions tailored to different levels of commitment.

In total, over the first week, there were 27 physical editions (18 CDs, eight vinyl LPs and one cassette) and seven digital download variants.

A range of covers, coloured vinyl, bonus tracks and signed inserts turned one album into a collectable series rather than a single product. Other artists – such as the Rolling Stones – have used this strategy before, but rarely at this scale or with such an intense response from fans.

Taylor Swift fans who are more price sensitive will have tended to buy the less expensive version of the album. More price-sensitive fans will include those who have lower incomes (where the album price is a higher proportion of their income) and those who are more casual Taylor Swift fans (where there are more substitutes available that they might prefer to spend their income on).

Taylor Swift fans who are less price sensitive will have tended to buy the more expensive premium version of the album. Less price-sensitive fans will include those who have higher incomes (where the album price is a smaller proportion of their income) and those who are more diehard Taylor Swift fans (where there is no close substitute for the latest Taylor Swift album).

Crosbie questions whether it is possible to have too many versions of a product. In this case, 27 versions do seem like a lot. It could be a very effective means of segmenting the market. However, that works best if each buyer only buys one version. There will be some fans who bought more than one version, and perhaps a substantial number who bought several. A non-trivial proportion of the most diehard fans probably own all 27 physical editions of the album.

This matters because the usual rationale for price discrimination through versioning is that consumers sort themselves across the available versions - the casual fans buy the standard version, while the diehard fans buy the premium one. But if some consumers buy multiple versions, the strategy is doing more than just segmenting the market. It is also encouraging multiple purchases from the same buyer. In that case, the different versions are not just substitutes for one another, but for some fans they become collectibles, with each version they collect adding a bit of extra value through completeness, exclusivity, or identity. So, the economics of versioning for Taylor Swift are not only about price discrimination between consumers, but also about extracting more surplus from the most committed fans.

There is a limit to how many versions even the most diehard fan is willing to buy, and that limit arises because of diminishing marginal utility. In economics, utility is the satisfaction or happiness the consumer gets from the goods and services they consume. Marginal utility is the extra utility the consumer gets from consuming one more unit of a good or service. Diminishing marginal utility is the idea that marginal utility declines as the consumer consumes more of a good. In the context of Taylor Swift's album, Crosbie notes that:

The first version of an album brings a lot of satisfaction. The fifth or sixth brings less. Eventually, another version does not add enough enjoyment to justify the price. Fans begin to feel they have had enough.

It is clear that there is a balance to be found between maximising profits by price discrimination using versioning, and the number of versions that are offered when some consumers will want to buy multiple versions. Price discrimination can be an incredibly profitable pricing strategy for firms, including for Taylor Swift. Maintaining fan engagement and encouraging diehard fans to spend more by making the versions collectible are also important. As Crosbie notes in his article:

Instead of leaving that money on the table, the strategy turns passion into profit. The cost of creating extra covers or vinyl colours is small, but the willingness of fans to pay more for them is high. That is exactly where versioning pays off.

In theory, it should be possible to work out the optimal number of versions that maximises long-run profit. The profit-maximising number of versions is not necessarily the number that best segments the market for the purposes of price discrimination, because diehard fans may buy multiple versions. It seems likely that Taylor Swift is well aware of this. Would you be willing to bet she hasn’t gotten close to that optimum? I wouldn’t.

Facebook Marketplace forces a change in TradeMe's business model, but will it succeed?

TradeMe is one of the key examples that I use when teaching about platform markets in my ECONS101 class. But competition from Facebook Marketplace is causing TradeMe to change its business model, and those changes are risky.

The reason why TradeMe is such a good example is that, by attracting buyers and sellers to its platform in the 1990s, TradeMe managed to keep eBay out of the New Zealand market. How did that happen? In a platform market, the firm (in this case, TradeMe) acts as an intermediary that brings together two parties (in this case, buyers and sellers) who would not otherwise interact or easily connect. Buyers using TradeMe create value for sellers, and the more buyers there are, the more value is created. Sellers using TradeMe creates value for buyers, and the more sellers there are, the more value is created. Once TradeMe was set up and had attracted a large share of buyers and sellers, it would be difficult for any other platform to set up in competition with TradeMe. And so, eBay couldn't get a foothold in New Zealand, and TradeMe had an effective monopoly over online auctions for many years.

TradeMe profited by charging a 'success fee' to sellers of goods on the platform. Buyers faced no fees. This reflects the principle that a platform firm (like TradeMe) should set a lower price for access to the platform to whichever side of the market has demand that is more elastic, ceteris paribus. In this case, buyers have more elastic demand for access to TradeMe, as there are many other places that they might go to buy things. Sellers, on the other hand, had more inelastic demand for access to TradeMe because no other place had access to the same quantity of buyers. That is, until Facebook Marketplace appeared.

Facebook Marketplace doesn't charge fees to sellers. And through its links to Facebook users, there are a large number of potential buyers on Facebook Marketplace. And so, there is now a viable (and cheaper) alternative to TradeMe for sellers. And now, TradeMe has finally reacted to this competition, as reported in the New Zealand Herald last month:

Trade Me is removing success fees for casual sellers, in a move that one marketing expert says is probably a response to the growing power of Facebook Marketplace.

Sellers have usually been paying 7.9% of the final sales price of items sold via Trade Me.

But a new fee structure will remove them from next week and site spokeswoman Lisa Stewart said casual sellers would be better off.

It is making other changes at the same time: bank transfers will not be possible and Ping will be offered on every listing alongside cash and Afterpay, with a 2.19% transaction fee for the seller. This provides buyer protection up to $5000 if trades go wrong.

Buyers will also pay a new service fee based on the purchase price, if items are more than $20. This will be 99c for goods sold for $20.01 to $100, $1.99 for sales between $100.01 and $250 and $4.99 for items over $250. Stewart said 44% of trades were under $20.

It was a response to customer feedback and what was happening in the market, Stewart said...

Massey University marketing expert Bodo Lang said it was likely to be in response from growth in the use of Facebook Marketplace, which offers no protection for buyers but charges no fees.

With Facebook Marketplace available for sellers, seller demand for using TradeMe has become more elastic. While the 'success fees' have been eliminated, TradeMe will still profit from sellers through mandating the use of its payment service Ping. And notice that buyers will also now pay a 'service fee' to TradeMe on successful purchases over $20. TradeMe is now leveraging its market power to derive revenue from a complementary good (payment services) rather than the auctions themselves. This change makes TradeMe's business model resemble that of Facebook Marketplace. Meta derives revenue from Facebook Marketplace though selling advertising (on Facebook Marketplace, but also on Facebook), rather than deriving revenue directly from the sales on Facebook Marketplace.

It remains to be seen whether Trademe's new business model will be successful. I question the wisdom of charging a service fee to buyers. They are still the more elastic side of Trademe's platform market, and they have a cheaper option available in the form of Facebook Marketplace. TradeMe is banking on buyers valuing the protection that TradeMe offers them, which Facebook Marketplace does not. However, it isn't clear how much buyers value that protection, and if they don't value it in excess of the new service fee, then they will continue to exit to Facebook Marketplace. And if buyers show an increasing preference for Facebook Marketplace, it won't be long before sellers start to reduce their listings on TradeMe. And if that happens, the market could tip and TradeMe could very quickly find itself in an irreversible decline.

This week in research #120

Here's what caught my eye in research over the past week:

• Büyükeren, Makarin, and Xiong (with ungated earlier version here) find that the full-scale launch of Tinder led to a sharp, persistent increase in sexual activity among college students, but with little corresponding impact on the formation of long-term relationships or relationship quality
• Chollete et al. find that recreational marijuana legalisation by US states increases property crime, although the effect disappears when they control for state-specific time trends
• Picault (open access) describes a method to introduce authentic group projects in senior undergraduate economics courses

Book review: The Business of Platforms

As I teach my ECONS101 class, a platform market occurs when a firm acts as an intermediary and brings together two (or more) groups, who otherwise would not connect or easily interact (platform markets are also known as two-sided markets, because the intermediary brings together two sides of the market). We think of platforms as mostly an invention of the digital age, because most of the examples that come to mind (TradeMe or eBay, Facebook, the Android operating system) are digital platforms. But in truth, platforms are everywhere. Credit card companies are platform firms - they bring together merchants and cardholders. Malls are platform firm - they bring together stores and customers. And so on. Once you know what to look for, you recognise just how endemic platforms have become in the modern economy.

I was interested to learn more about the business of platforms, so a few years ago I bought the 2019 book The Business of Platforms by Michael Cusumano, Annabelle Gawer, and David Yoffie. I finally got around to reading it last month. It was not a moment too soon either. I was inspired by the book to greatly expand on the platform market content in my ECONS101 class, specifically in the topic we covered last week. I'm sure they won't thank me for adding to the quantity of ideas that they may be assessed on, but the material from the book added a lot of depth to what was previously a fairly cursory description of two-sided markets.

The importance of understanding platforms is exemplified by their growing importance in the (global) economy. Cusumano et al. write that:

In short, managers and entrepreneurs in the digital age must learn to live in two worlds: the conventional economy and the platform economy.

To that, I would add that consumers and policy makers also need to understand the fundamentals of platform markets. It is there that this book excels. Cusumano et al. provide a clear description of what platform markets are, the 'winner-take-all (or most)' nature of those markets, and the different types of platform markets. They use a wide array of examples to illustrate the concepts, from Android to YouTube, and everything in-between. I'm sure that they could have easily turned the exercise into a textbook treatment. However, the numerous examples they use give more depth and provide more interesting perspective than you would get from a textbook.

After outlining the basics over the first few chapters, the book turns to common mistakes that platform firms make. Many of their examples will be familiar as exemplars of business failure, such as how Microsoft first captured the browser market with Internet Explorer, before subsequently losing their dominance to Firefox and ultimately to Google's Chrome browser. Next, the book looks at how firms can develop a platform, again carefully illustrating the pitfalls of the different options available to firms with real-world examples.

Finally, the last section looks to the future of platforms, but also takes a more normative view, advocating that platform firms should "harness platform power, but don't abuse it". Cusumano et al. have written their book with managers and entrepreneurs in mind, and this last section is an appeal to those future leaders of platform firms. In particular, they focus on antitrust issues, privacy concerns, fairness towards the workforce ("not everyone should be a contractor", and in particular that firms should self-regulate. While this section does paint a picture of how platform firms can easily become bad actors, it seems unlikely to move the needle on platform firms' worst abuses.

Overall, I really enjoyed this book. It is rare these days that a single book adds significant new content to one of the papers I teach, and I really appreciated the clarity that Cusumano et al. bring to this topic, and the way they structured their ideas in a way that was easy to follow. If you are looking to understand platform markets, this book seems essential to me, and I highly recommend it.