Question

In: Economics

Record companies prioritise their new releases of music each by the senior management deciding on which...

Record companies prioritise their new releases of music each by the senior management deciding on which new releases should receive priority in marketing to radio stations and music stores. Here the musician might be considered a ‘principal’ who uses the services of the record company, the ‘agent’, to produce and market their sound recording. Does the description of the prioritising of new releases suggest that an incentive problem may arise between the principal and agent? Evaluate and comment upon the following types of contracts from the musician’s perspective. The record company receives a fixed amount of total revenue. The record company receives a fixed amount of total revenue plus payment for the costs of advertising. The record company receives a proportion of the total profits.

Solutions

Expert Solution

The principal and agent relationship acts as the part of Agency theory. The focus of the earning profit is the centric theme lives with every business dealings in many businesses. The entertainment industry also plays one important role in adding considerable GDP, which is accountable for mass economic development. Many employers and employees involved in the entertainment business for their earnings. The back end operations of all the employees mainly depend upon the mass market of the musicians (principal) and the production company (agent) who helps to pool the windfall profits by extending and using the optimal marketing strategy. Let us discuss the incentive problems arouse between the principal and the agents.  

The reputation of the music recording business mainly depends upon the talent of the musicians and their earning history through past recording and releasing of albums. There are two stages of the promotion of music recording companies. In the first stage, the musicians should render popular and catchy songs by attracting more marketing companies to sign an agreement with popular musicians. But the profit-sharing system remains a major issue in creating to have a share of incentives accordingly with the investment of both the parties. The pulse of music listeners plays a vital role in deciding the market and the incentive.    

The contract of both parties should satisfy the condition of sharing the incentives equally. On the festive occasion, the Musicians adamantly took pride to share more incentives than the share of the agents. In some situations, the music companies have also sued musicians in the Federal Court of the US to pay for the loss bare by the agents to get an equal share when they strived hard to market the albums and reaching them to music listeners. So the musicians should think about the cost of advertising bared by the recording companies. And the musicians should get the royalty after deducting the total cost from the totally gained revenue of the recording companies.   


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