Yes, you can ruin a sound economic principle by taking it too far.

One of the basic underpinnings of Economics 101 is this: the creation/illusion of scarcity is good for the provider because it (artificially) stimulates demand, giving the owner of the good the option to make a tidy profit either due to increased volume and/or the ability to raise prices.

A company that demonstrates a sound understanding of this economic principle is McDonalds Corp. They regularly roll out the Monopoly challenge for “a limited time only”, increasing demand among fast food customers weighing their options about where to eat by convincing them to go to McDonalds because those Monopoly pieces will only be around for a couple weeks (if the promotion ran year-round, the novelty would wear off to the point where it provided the company no additional edge).

McDonalds also does this with the McRib. They only roll it out for a couple weeks per year, and they sell it for a couple bucks (compared to what you’re going to find a dollar/value menu), and they are able to use this scarcity principle in a way to stimulate the demand for McRibs during the time of the promotion. If they sold McRibs year round, they would either have to lower the price or accept lower volumes, perhaps both.

But you can take the scarcity principle too far.

Take what Columbia records just did with the Bob Dylan’s rendition of the song Pretty Saro. He played in the studio half a dozen times while he was recording Self Portrait, but the song did not make the final cut of the album. Keep in mind this happened in 1970, perhaps the only time in Dylan’s life in which he could hold his own vocally with Van Morrison.

http://www.youtube.com/watch?v=uSdVOEKW5YA

It’s a beautiful song, and let’s set aside for a moment the morality of a record company holding back great pieces of art from the public. We’re going to talk purely economics here—Columbia Records chose to keep this song in the vault for 43 years. They pull this same stuff with Springsteen’s outtakes from the Darkness, River, and Born In The USA eras.

The problem with holding back music for four decades is the fact that most of the fans are dying off. Yeah, I’m a guy in my early 20s that listens to The Boss and Dylan religiously, but I’m weird like that. I don’t fit the typical demographic. Most Dylan fans are in their 50s, 60s, and 70s, and Springsteen’s fan base, while slightly younger, also occupies that 45-65 demographic.

The clock is ticking—we’re not in Chateau Cheval Blanc 1947 wine territory here, where the longer you hold back, the more expensive the product becomes. There is a yield curve at play with the demographics—more people will buy Springsteen and Dylan outtakes today than if Columbia chooses to release them in 2033, because the type of people that would be interested in purchasing those outtakes are still living on the right side of the ground.

Worrying about scarcity is only half the equation. You also have to intersect it with peak demand potential. McDonalds doesn’t sell the McRib one day per year because that would ignore optimal demand—you can ring the cash register for 4-6 weeks per year before the novelty wears off. Columbia Records doesn’t seem to understand that intersection. Waiting almost half a century to release Dylan songs is not the way to take advantage of optimal demand (with one exception: if Columbia released all of Dylan’s and Springsteen’s works right after their respective deaths, there is a sound business argument to make that the optimal demand would occur then). I could be wrong, but I can’t imagine that the unreleased Springsteen and Dylan outtakes that get released twenty years from now will sell as well as stuff Columbia chose to release in the late 1990s, simply because the target market will have diminished by then.

Originally posted 2013-08-26 09:18:56.

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