Market structure and the incentives to innovate in the Norwegian music industry

Abstract

In this thesis, I study market structure and incentives to innovate in the Norwegian music industry. The industry has gone through significant changes since the year 2000. Every part of the value chain has been disrupted by technology, and the barriers to entry have decreased. However, major labels seem to have kept their market share. I define product and process innovation as respectively the release of a new artist and the release of a subsequent album. A product innovation gives the label the ability to release subsequent process innovations, which is needed for the label to recoup the investment of the product innovation. I demonstrate how market structure affects the incentives to invest in product and process innovation by using a logistic regression. My results show that independent labels invest two times more than major labels in product innovations. The objective for all labels is to release a product in the market with an innovative sound. The major labels will benefit from the first innovation by releasing multiple subsequent process innovations that allow them to benefit from diminishing cost. The independent label will release the first album, but cannot compete in the market for the second album because of lack of capital, less access to promotion channels and a small existing music catalogue. Competition in process innovations is too intense, so the independent labels will therefore continue to compete in product innovations by targeting the subculture and re-segmenting their portion of the market while major labels reap the larger benefits from process innovations, which maintains their market share.