Week 1
Adding value to innovation: Impressionism and the transformation of the selection
system in visual arts
Valuation of cultural products tends to be problematic. In this paper, we provide insight into
how valuation of cultural prod- ucts takes place by describing the changing role and signifi-
cance of different types of selection systems. Three basic types of selection systems are
distinguished: market selection, peer selection, and expert selection. We show that the rise
of a group of painters known as the Impressionists was facilitated by a change in the
selection system of the visual arts industry from one dominated by peers into one dominated
by experts. In the new selection system, innovativeness has become the most highly prized
product characteristic, while a range of experts have begun to play an essential role,
certifying the innovativeness of either individual artists or groups of artists.
Determining quality or value cultural products is difficult → still some form of value must be
assigned. Only through value determination the significance of each product can be
established, allowing it to obtain crucial resources. Peer selection through established
Academies was replaced by expert selection which relied on museum curators, ideological
dealers, and professional art critics. This change was accompanied by an increase in value
of innovation and raise in status of Impressionists.
Value of product can only be determined within the context of a set of preferences of
individuals and groups that act as selectors. Three basic types of selection systems:
1. Market selection; producers are selected and consumers are the selectors
2. Peer selection; selectors and the selected are part of the same group
3. Expert selection; selectors are neither producers nor consumers, but have power to
shape selection by virtue of specialized knowledge and distinctive abilities
→ outcomes of competitive processes are often determined by a combination of types of
selection.
Expert selection is selection system which began to dominate visual arts in 20st century. In
many forms of cultural industries, recognition and attribution of value is strongly linked to
product differentiation. One way to differentiate is innovation → more radical forms of artistic
innovation that break with existing standards had rarely been used as deliberate strategy.
Innovation attains value only is it is considered valuable by selectors that control selection
system → often innovative art only successful if innovators change the way in which value is
determined (happened in modern visual arts industry → innovation dominant criterion and
from peer to expert). There is symbiotic relationship between artists who innovate and
experts who can help establish value → important in rise Impressionists.
Impressionists brought change in selection system bc they were not satisfied with how
innovations were being rewarded → shift in selection system increased strategic value of
being innovative. Impressionists did not replace academy with single new central institution
→ new system developed together with a few crucial elements that did already exist but took
on new characteristics and increased in importance.
In 18th century art museum was repository for works of dead artists and school for training
young artists → in 19th century museum began to play more active role in exhibiting work of
more current artists (certifying artists while they were still alive). Modern art museums began
to focus on significant new trends in painting, attempting to distinguish between styles →
focus on crucial innovators. Museums began valuing art in terms of innovativeness. This
new role was partly result of concerted push by many of the Impressionists.
Acadamies served to promote artists by holding exhibitions → later for sale. Commercial
succes came to Impressionists through growth in importance of commercial art galleries. Art
,dealers discovered that having ideology made selling a more virtuous and therby more
profitable activity. Museums more willing to collaborate with dealers and showcase artists
whose work the galleries were trying to sell. The willingness of museums to accept the
paintings, and thus certify them as ‘‘museum art,’’ further reinforced, in turn, the willingness
of private collectors to acquire them in the first place.
Journalist-art critic → task is enlighten and educate rest of the nation (demand for
well-written explanations of which works of art were to be appreciated only increased with
rise of social mobility). Professional critics who were not artists themselves started to appear.
Artists needed critics to convince other that his/her works were valuable → critics had to
prove worth by spotting most innovative artists and newest styles. Dealers also increasingly
looked at art critics for assistance.
Thus, museums, dealers, and critics were drawn together with the same purpose: the
establishment and defense of the credentials of a group of artists for being innovative.
Positive feedback loops, however, went be- yond just providing the impetus for the
development of the three central elements of the new system. There was a significant
positive feedback loop between the three elements and the relative importance of innovation
as a means of differentiating artistic performance. After the rise of the Impressionists,
innovation gradually came to serve as the dominant criterion for the evaluation of the quality
of artistic performance. This reinforced the position of the experts who could certify a
painting’s innovative character.
Artistic innovativeness is difficult to evaluate → reinforces position of experts and makes
more likely that group formation will become important.
Above all, this paper sug- gests that a close inspection of the selection system of a particular
industry is a necessary first step towards understanding the dynamics of the competitive
processes and the development of the institutional structures in that industry.
Contracts between art and commerce
Basic structural characteristics of creative industries (their technologies of production and
consumption) resist governance by anything approaching a complete contract → but they
still have evolved distinctive and serviceable contract forms that differ from other sectors.
Inspirations of artists reach consumers with the aid of other inputs - humdrum inputs - that
respond to ordinary economic incentives. The question of how contracts work between art
and commerce is nested within larger question of why artists and humdrum inputs choose to
structure their relationships as they do. Organization of arts and entertainment industries
depend heavily on contracts → vary in form, but all depend strongly on common set of basic
structural properties.
Several bedrock structural properties seem to underpin organization of creative industries:
- Nobody knows - fundamental uncertainty that faces the producer of a creative good.
This wouldn’t matter is inputs to flopped creative effort could be salvaged and
reused, but sunk costs denies producer this protection.
- Art for art’s sake - the utility that the artist gains from doing creative work (lies in the
attitudes of artists toward their work). Also embraced artists’ tastes as to how the
creative work is to be performed, the technique or style to be employed.
- Horizontal and vertical differentiation, temporal coordination, durability and the
hazards of coordination when several artists must collaborate.
To understand how these properties shape the deals that govern creative industries’
operation we draw on contract theory → some points of connection between contract theory
and conditions of creative industries:
, 1. Contract theory pays attention to asymmetrical information → seller knows key
characteristics of product not known to buyer (nobody knows; symmetrical ignorance)
2. While principal-agent relationships are important in creative industries, many deals
involve joint ventures between symmetrically placed suppliers of diverse inputs
3. Production in creative industries commonly involves inputs attached in
technologically determined sequences → critical problems arise of assigning and
transferring decision rights as the project passes from one input supplier to the next
Visual artist and art gallery
Relationship between artist and art gallery may seem simplest of economic transactions but
is complex and problematic by bedrock properties → art for art’s sake carries a career twist
evident from young artists’ training and apprenticeship. Romantic ideal explains why artist
and dealer agree on long-term joint venture → artist enters into protracted partnership with
dealer → dealer will display artist’s work and articulate problem solving context and evolving
meaning to collectors and others. Joint venture involves contract in which artist prepares for
periodic gallery shows → dealer undertakes to promote artist’s work with collectors, critics
and curators, and two parties divide revenue. Contract has no explicit duration; parties can
go separate ways. Division of gross revenue is noteworthy feature → depresses each party’s
incentive to incur mutually beneficial costs. Contract also encounter problems of moral
hazard.
Author and publisher
Relationship between author and publisher is simpler. Art for art’s sake tastes of both artist
and author orient them toward creating bodies of work over a lifetime career → author
finishes book infrequently, which lowers stakes for optimizing long-run future terms in
author-publisher deal. In trade publishing, the literary agent plays distinctive role. Agent
serves as marketer of author’s services to publisher, and author-agent deal precedes
author-publisher deal. Agent serves as matchmaker, knowing what sorts of manuscripts will
interest which publishers and able to discern and bring out merit in author’s work sufficiently
that a publisher will recognize it. Agent can elicit information relevant to publisher: author’s
flexibility, punctuality, etc. Agent, who is compensated by share of author’s royalties, will
suffer from representing weak or uncooperative authors. Publisher’s own contract is
revenue-sharing deal that awards author royalty expressed as fraction of book’s wholesale
or retail list price. Only small inventive to exert joint-profit-maximizing → author gets
advance; working capital provided to impecunious author / publisher enjoys latitude on how
much to spend promoting author’s book. Role of advance illustrates important general point
about revenue-sharing contracts: a party’s incentive can be intensified without upsetting the
distribution of benefit between the parties by pre committing some outlay that the transferor
can then earn back. Against invasions of publisher’s potential cash flow are stacked the
advantages of agent’s services as gatekeeper → without agents, publishers would incur the
cost of gatekeeping.
Musician and record label
Contract turning on the problem of allocating decision rights efficiently → has joint venture
form, but it adds crucial element that the creative good’s production proceeds in steps: one
party supplies its input (sunk costs), then hand incomplete good to next party for attaching its
input specialty. Nobody knows the consumers’ valuation of end product, but completing step
in sequence tends to reduce uncertainty of prediction. Consider how these parties can
manage the sequence of production steps to maximize expected value of end product.
Standard contract between record label and musician: label advances musician a sum to
cover cost of recording plus negotiated amount of expected royalties. Upon delivery of album
, the label holds option to issue the recording → if exercised the clock starts for second album
(with larger advance and higher royalty rate). Upon each delivery, the label decides whether
to proceed. If album royalties fail to cover its advance, the shortfall becomes a charge
against records issued subsequently (cross-collateralization). Options are one-sided →
musician may not quit the label until contract expires.
Complex creative goods require several artistic talents along with humdrum inputs → each is
a complex institution with its own distinctive features.
Cinema films
Producer as coordinator identifies and recruits principal creative participants → vertical
differentiation plays important role. Creative good’s quality in the eyes of consumers can be
increased by enlarging fixed cost expended on it. There seems to be something more
involved than pairwise complementarity → every input needs to perform at least up to some
level of dedication and proficiency to beget a work of unified quality. That participants are
available at right time is other constraint → feeds back to putting deal together. Committed
participants incur sunk costs of negotiation and foreclosure of other opportunities, and so the
last party to sign gains strategic leverage → can protect against this by: play or pay contract
→ guarantees pay even if dismissed from project. Hold-ups of this and other types
encounter a defense in the form of reputation in the film-making community, where word of
uncooperative behavior spreads freely.
TV program series
If program succeeds, key actors gain strategic leverage → producers ward off this hold-up
by insisting on contracts that bind key actors for long time periods. The option contract is
accepted practice in TV broadcasting, but it clearly exacts its costs. Programs sometimes
get cancelled because stalemates arise in renegotiating contracts.
Aided by simple contract theory, the patterns of deal making in the creative industries tell a rich story
about how parties— both artist and humdrum—structure agreements to address complex incentive
problems. One does not think of the arts and entertainment industries as sectors organized around
sophisticated commer- cial contracts. Yet the very structural features that challenge economic
calculation serve to explain why deals are structured as they are. Revenue-sharing joint ventures with
up-front payments and real option contracts with successive transfers of decision rights make repeated
appearances in the creative industries. A great deal of qualitative evidence supports these descriptive
conclusions. However, we lack a deeper knowledge about the trade-offs and terms of these deals that
could come from access to samples of contracts and their specific terms. Questions such as these might
receive answers: To what degree are contracts formally binding in creative industries versus providing a
basis for renegotiation when certain future states of nature emerge? How much of a role does risk
spreading play in contracts in these highly uncertain markets, especially given artists’ many forms of
risk-loving behav- ior? In creative industries where some humdrum enterprises possess elements of
market power, in what forms are these deployed in contracts with talent?
Cultural industries: Product-Market characteristics, management challenges and
industry dynamics
During the last decade, cultural industries have grown in economic importance, and research interest in
them has increased. Despite prolific research, there is a lack of a comprehensive view on the subject.
The purpose of the present paper is to offer a reconceptualization of cultural industries by tracing their
boundaries, their features and the dynamics that follow from these features. This is achieved through a
review of 314 cultural industries studies, whereby a classification system of three main and six
sub-categories is constructed. On the basis of the review, a framework for future research is presented.
Most importantly, future research should examine selection criteria and selection performance, and
explore the relationships between tastes, sales, diversity and quality. In this way, researchers might be
able to create some order in the extreme uncertainty that cultural industries managers face.
It remains unclear what characteristics make industries cultural, and what phenomena are
specific to them. Purpose paper: offer reconceptualization of cultural industries by tracing
