The past posts
have often portrayed the applications of economics in real life. To stress the
obvious again, economics is far from abstract. There is inherent application of
its concepts in day to day life. Often the application might be sub-conscious
or maybe many a times, the applications find themselves convenient to be
theorized. Theory flows from evidence and theory created has to be backed by evidence.
Maybe it is a typical chicken egg problem but nevertheless, makes economics attractive.
Contrary to many economists who portray a dull life for an economist, in
reality, the applications of economic theories in every aspect of life can make
the subject very colourful. In continuation of the past analysis, the current
post too takes up a few more examples to illustrate economics in real life or what
Robert Frank would call economic naturalist.
Let us take the instance
of the film industry, India in particular. The Indian film industry thrives on
remaking the Western films in the Indian context. The regional language movies
are often remade in Bollywood, there is also the reverse happening. Most films
follow a set stereotype. The formula remains the same. The storyline doesn’t vary
a lot. Many films are notoriously predictable in their storylines. The songs
too are often remake or reworked from the earlier songs. Little creativity
exists. In fact, the Indian movie industry is known for songs something not
found in any other film industry. Item numbers seem routine in every film. A
film minus an item number doesn’t seem to exist. The plot around which the film
revolves too has remained stagnant for years. It is just that the backgrounds
and the actors have changed. Unlike the movies in the West, Indian movies
rarely experiment. The movies even when made of a historical storyline are
dramatized to the extent of making it a fiction. Rarely justice is done to the
subject with the focus often on the entertainment quotient rather than the plot
is supposed to be depicted. Interestingly, the art films which were supposed to
be in contrast to commercial cinema industry thriving in Bollywood too did not
deviate much from the storyline. They too were predictable for most part. The only
change perhaps was they bereft of song and dance. This background makes one
wonder why experimentation would be rare in Indian movie industry. Further,
when the experimentation does happen and succeed, it invariably followed by
movies with similar plots for years. The reasons are not far too seek.
Film industry
landscape is dominated by the presence of implied demand uncertainty. There is
no doubt a demand for entertainment. Movies constitute a critical component of
entertainment industry and thus demand for movies too exist. Movies in terms of
cost are characterised by instantiation. They involve high fixed costs which
are incurred upfront before the production of the movie. The cost of producing multiple
copies of the movie is negligible. Thereby, there is an added element of
uncertainty with reference to recovery of costs in case the movies flops at the
box office. While as seen above, there is demand for movies in general, it is
difficult to estimate to demand for specific movie. While people would watch
movies, the probability that people would watch a specific movie would be rare.
To add, they may not want to watch a movie at a specific theatre or screen if
they have bad experience over there. Thus the movies not only suffer from an
uncertainty with respect to the movie watching preference itself, they also are
contingent on the satisfaction level of the customers with reference to a specific
movie theatre. Given these uncertainties, they would naturally seek to minimize
risk. The risk minimization strategy entails producing films which have a
reasonable probability of success. This implies the plots of successful movies
being replicated. While there is no guarantee that it might succeed but the fact
that the past movies on the storyline have tasted success gives some reasonable
probability, albeit subjective of being successful. A film maker creating a lot
of experiments, incurring high costs but unable to perform well at the box
office would be a disaster for the producer. Thereby they seek to go in for a
safer option, thus we see formula movies and formula songs.
It’s not merely
the film industry that experiences implied demand uncertainty. There are
industries across board which do face this given the uncertainties people’s
acceptance of the product or service. The theatre industry and fine arts
industry too are examples of the same. It is utterly unpredictable why a
particular painting is termed a masterpiece whereas another seemingly better
painting might fall by the wayside. There is very little logic at times to
explain why a particular theatre show gets great reviews and audiences whereas
there are many others which fall by the wayside. Many reviewers had felt the
KBC to be a dud yet, it rose to be one of the most popular shows of all times. Prima
facie, there seems to be little logic in these instances.
Aside of
entertainment, retail industry too faces implied demand uncertainty. This happens
when there is uncertainty in a component of the supply chain cycle. Incidentally,
while people definitely want a toothpaste or a soap, there is very little
certainty on which brand of toothpaste or soap would they prefer. Therefore in
product launches too, there would be an element of uncertainty. This uncertainty
creates a hazard in demand forecasting. Given the hazards of demand
forecasting, there is a tendency either the firm ends with higher levels of inventory
thus possibly higher carrying costs while at times might end with stock out
issues thus increasing stock out costs. Therefore, the firms often err in their
demand forecasting calculations. This results in higher costs which is often
termed in supply chain management as bull-whip effect. In the aviation industry
too, while there is a demand at a particular airport, but there would be
uncertainty over demand for specific route in question. Of course in markets
like aviation or road transport, there is an element of contestability that
might reduce the costs imposed by implied demand uncertainty. As we observed in
the above examples, the determinants of demand are not easily forecasted and
thus the supply side too faces uncertainties.
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