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Saturday, October 25, 2014

Market power, monopsony and the porn industry

by John MacBeath Watkins

In a previous post, we discussed how changes in the music industry explain a bit of the Solow paradox, the fact the new technology is being adopted, but productivity hasn't seen much increase. Now we have another example of a way in which technology is suppressing, rather than increasing, productivity growth.

It also shows how power can transfer wealth from one group to another in ways a free market wouldn't allow based on monopsony, the dominance of a buyer in the marketplace.

The porn industry, once an economically vibrant part of the economy, has been devastated by changes in the business even as it adopts new technology. Porn stars once had a decent income from their performances, but now many have to work as prostitutes on the side to support themselves. It's a bit like the musicians who used to make most of their money from recordings, and now find they must get their living from live performances.

Like the musicians, part of their problem is piracy. Computer technology allows the rapid and almost perfect copying of music and videos. As a result, many viewings of porn have been taken entirely out of  the economic sphere.

But in the case of porn, there's another problem, the market power of the main distributor. The industry is dominated by Mindgeek, formerly Manwin. The company describes itself as being founded in 2013, but that's just when it changed its name back to Mindgeek after a period of being known as Manwin. Each name change came after its owners ran into legal trouble, resulting in the sale of the business.

Mindgeek has something like monopsony power over the porn studios. They own an array of "tubes," the Youtube-like on-line distribution channels for porn.  They also own a lot of porn producers, and are essential for the distribution of the works of other porn producers. According to a recent Slate article, Mindgeek doesn't always pay the porn producers when they put up a video on one of their sites:
Even content producers that MindGeek owns have trouble getting their movies off MindGeek’s tube sites. The result has been a vampiric ecosystem: MindGeek’s producers make porn films mostly for the sake of being uploaded on to MindGeek’s free tube sites, with lower returns for the producers but higher returns for MindGeek, which makes money off of the tube ads that does not go to anyone involved in the production side.
 The result is that performers have to have sex more times to support themselves, performing for the videos and doing their "live" performances as prostitutes.But isn't more work for less money lower productivity as we account for such things?

There was a time when one company in an industry owning most of the production and distribution would have set off alarms in the Justice Department and resulted in anti-trust action. That changed in 1980 with the election of Ronald Reagan. Word soon went out that the justice department would not be worrying about practices such as predatory pricing, and in fact, was really only worried about monopoly power if it resulted in higher prices to consumers, essentially meaning that the Justice Department was now mainly interested in price fixing in its anti-trust enforcement. It was a legal theory advanced by Robert Bork in a book titled The Antitrust Paradox.

This radically changed the incentives for American businesses. Predatory pricing, a practice that got Safeway in trouble with the Justice Department in the 1960s, became a notorious tactic of WalMart. The key was not to use this power to raise prices, but to dominate its markets and use its market power to squeeze producers.

Mindgeek is using a similar tactic. It is distributing the product for free on ad-supported sites, while squeezing porn production companies and performers to lower its costs. It routinely violates the intellectual property rights to sexual performances, but is so essential to production companies and porn performers for distribution that many say they can't speak out about the problem.

So, why don't the production companies get together and refuse to sell to Mindgeek unless they get paid? Well, if they demand a given price for their goods, that would be price fixing, one of the few aspects of the anti-trust act that the government is still enforcing.

Production of porn films is down 75 percent from the year before Mindgeek was founded. DVD sales of porn are down 50% over the same time span, because who wants to pay for porn they can watch for free if they tolerate some ads?

Netflicks and Amazon are starting to produce their own content (not porn, so far as I know.) We can expect more ethical behavior from them than we see from Mindgeek, but the incentives will be the same. We need to re-examine how our legislation regarding market power affects people selling their wares to distributors or working for them.

The paradox referred to in Bork's book was that antitrust action to increase competition could increase, rather than decrease, prices. What he either failed to realize or didn't care about was that monompsony power, the market power of a dominant buyer, interferes with the business arrangements of people who contract to sell their wares or labor to that buyer. This represents a transfer of wealth from one group to another based on power rather than the workings of a free market just as much as price fixing does.

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