American Economic Association

The Economics of Superstars

Author(s): Sherwin Rosen
Source: The American Economic Review, Vol. 71, No. 5 (Dec., 1981), pp. 845-858
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1803469
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 The Economicsof Superstars
By SHERWINROSEN*
The phenomenonof Superstars,wherein
relatively smallnumbersof people earn enor-
mous amountsof moneyand dominatethe
activitiesin whichtheyengage,seems to be
increasingly importantin the modernworld.
While some may argue that it is all an illu-
sion of worldinflation,its currencymay be
signalinga deeperissue.1Realizingthatworld
inflationmay commandthe title,if not the
contentof this paper, quickly to the scrap
heap, I have foundno bettertermto describe
the phenomenon.In certain kinds of eco-
nomic activitythereis concentrationof out-
put among a few individuals,markedskew-
ness in theassociateddistributionsof income
and verylargerewardsat thetop.
Confidentialitylaws and otherdifficulties
make it virtuallyimpossibleto obtain sys-
tematicdata in thisfield.However,consider
the following:
(i) Informedopinionplaces the number
of full-timecomediansin the United States
at approximatelytwo hundred.This is per-
haps a smallernumberthan were employed
in vaudevilliandays,thoughit hardlycan be
maintainedthat the demand for (intended)
comic reliefis in a state of secular decline.
Some of the morepopular performers today
earn extraordinary sums, particularlythose
appearing on television.The capacity for
televisionto produce high incomes is also
manifestin the enormous salaries paid to
networknewsbroadcasters.
(ii) The marketfor classical music has
never been larger than it is now, yet the
number of full-timesoloists on any given
*University of Chicago and NORC. I am indebtedto
the National Science Foundationforfinancialsupport,
and to GaryBecker,David Friedman,RobertJ.Gordon,
Michael Mussa, EdwardPrescott,and GeorgeStiglerfor
helpfuldiscussionand comments.
' That escalationis not confinedto wars and pricesis
establishedby the fact that Stars would have sufficed
not long ago. Academics have a certain fondnessfor
Giants,whilebusinessmenpreferKings.Obviouslythere
is a fair bit of substitutionamong all these termsin
depictingrelateddata in different contexts.
845
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instrument is also on theorderof onlya few
hundred(and much smallerforinstruments
other than voice, violin, and piano). Per-
formersof first rank comprise a limited
handfulout of these small totals and have
verylargeincomes.There are also knownto
be substantialdifferences in incomebetween
them and those in the second rank, even
though most consumerswould have diffi-
cultydetectingmore than minordifferences
in a "blind" hearing.
(iii) Switchingto morefamiliarterritory,
sales of elementarytextbooksin economics
are concentratedon a group of best sellers,
thoughthereexists a large numberof very
good and highly substitutablealternatives
in the market(the apparent inexhaustable
supply of authors willing to gamble on
breakinginto the selectgroup is one of the
reasonswhyso manyare available). A small
numberof graduate schools account for a
large fractionof Ph.D.s. A relativelysmall
numberof researchersaccount for a large
fractionof citationsand perhapsevenarticles
written.
Countlessotherexamplesfromthe worlds
of sports,artsand letters,and showbusiness
will be well known to readers. Still others
can be found in several of the professions.
There are two common elementsin all of
them: first,a close connectionbetweenper-
sonal reward and the size of one's own
market;and second, a strongtendencyfor
both marketsize and rewardto be skewed
towardthemosttalentedpeople in the activ-
ity.True,standardtheorysuggeststhatthose
who sell moregenerallyearn more.But that
principleapplies as well to shoemakersas
to rock musicians, so somethingmore is
involved. In fact the competitivemodel is
virtuallysilentabout any special role played
by eitherthe size of the total marketor the
amountof it controlledby any singleperson,
because productsare assumed to be undif-
ferentiatedand one seller'sproductsare as-
sumed to be as good as those of any other.
846 THE AMERICAN ECONOMIC REVIEW
The elusive quality of "box officeappeal,"
the abilityto attractan audience and gener-
ate a large volume of transactions,is the
issue that must be confronted.Recognition
thatone's personalmarketscale is important
in the theoryof income distributionhas a
long history,but theidea has not been devel-
oped very extensivelyin the literature.2I
hope to fill in some of the gaps in what
follows.
The analyticalframework used is a special
typeof assignmentproblem,the marriageof
buyersto sellers,includingtheassignmentof
audiences to performers,of students to
textbooks,patientsto doctors,and so forth.
Rest assuredthatprospectiveimpresarioswill
receiveno guidancehereon what makes for
box officeappeal, sometimessaid to involve
a combinationof talent and charisma in
uncertainproportions.In the formalmodel
all thatis takenforgrantedand represented
by a single factorratherthan by two, an
index q labeled talentor quality.The distri-
butionof talentis assumedto be fixedin the
populationof potentialsellersand costlessly
observableto all economicagents.Let p be
the priceof a unitof service(forexample,a
performance, a record,a visit,etc.) and let m
be the size of the market,the numberof
"tickets" sold by a given seller. Then an
overallmarketequilibriumis a pair of func-
tions p(q) and m(q) indicatingprice and
market size of sellers of every observable
talentand a domain of q such that: (a) all
sellersmaximizeprofitand cannotearnlarger
amountsin otheractivities, and (b) all buyers
maximizeutilityand cannot improvethem-
selvesby purchasingfromanotherseller.
Propertiesof sellers' maximumnet reve-
nue functions,R(q), will have special inter-
est. Specifically,convexityof this function
describes much of the observable conse-
2AlbertRees is a good introductionto thesize distri-
bution of income.The selectivityeffectsof differential
talent and comparativeadvantage on the skew in in-
come distributionsare spelled out in my 1978 article,
also see the referencesthere. Melvin Reder's survey
touchessome of the issues raisedhere.Of course social
scientistsand statisticianshave had a long standing
fascinationwithrank-sizerelationships,
as perusalof the
many entriesin the Encyclopediaof the Social Sciences
will attest.
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DECEMBER 1981
quences of Superstars.Since R(q) is the
transformation thattakes the distribution of
talentto the distribution of rewards,convex-
ity implies that the income distributionis
stretchedout in its right-hand tail compared
to thedistribution of talent.Hence a genuine
behavioraleconomicexplanationis provided
for differential skew between the distribu-
tions of income and talent,a problem that
has been an interesting and importantpreoc-
cupationof theliterature on incomedistribu-
tion down throughthe years.3Convexityof
R(q) literallymeans thatsmalldifferences in
talent become magnifiedin larger earnings
differences, with great magnificationif the
earnings-talentgradient increases sharply
near the top of the scale. This magnification
effectis characteristicof the phenomenon
underconsideration.
Convexityof returnsand the extraskewit
impartsto thedistribution of earningscan be
sustained by imperfectsubstitutionamong
differentsellers,which is one of the hall-
marksof the typesof activitieswhereSuper-
starsare encountered.Lessertalentoftenis a
poor substituteforgreatertalent.The worse
it is the largerthe sustainablerentaccruing
to higher quality sellers because demand
for the better sellers increases more than
proportionately:hearing a succession of
mediocresingersdoes not add up to a single
outstandingperformance.If a surgeonis 10
percentmore successfulin savinglives than
his fellows,mostpeople would be willingto
pay morethana 10 percentpremiumforhis
services.A companyinvolvedin a $30 mil-
lion law suit is rash to scrimpon the legal
talentit engages.
Imperfectsubstitutionalone implies con-
vexityand providesa verygeneralexplana-
tion of skewedearningsdistributions which
applies to myriadeconomicserviceactivities.
3Few economic behavioralmodels exist in the liter-
ature. On this see Harold Lydall. Jacob Mincer has
shown that investmentcan produce skewnessthrough
the force of discounting,and established that as an
importantsource of skewnessempirically.Learningis
not treatedhere because those issues are well under-
stood, whereas the assignmentproblem has received
little attention.Some recentworks,but with different
focus and emphasis than is discussed here, are Gary
Becker(1973), David Grubb,and Michael Sattinger.
VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS
However,preferences alone are incapable of
explainingthe otheraspect of the Superstar
phenomenon,the marked concentrationof
output on those few sellers who have the
most talent. This second feature is best
explained by technologyrather than by
tastes.4 In many instances renderingthe
serviceis describedas a formof joint con-
sumption,not dissimilarto a public good.
Thus a performer or an authormustput out
more or less the same effortwhether10 or
1,000people showup in theaudienceor buy
the book. More generally,the costs of pro-
duction (writing,performing, etc.) do not
rise in proportionto the size of a seller's
market.
The key differencebetween this technol-
ogy and public goods is thatpropertyrights
are legallyassignedto theseller:thereare no
issues of free riding due to nonexclusion;
customersare excludedif theyare unwilling
to pay the appropriateadmission fee. The
impliedscale economyof joint consumption
allows relativelyfew sellers to service the
entiremarket.And fewerare needed to serve
it the morecapable theyare. When thejoint
consumptiontechnologyand imperfectsub-
stitutionfeaturesof preferencesare com-
bined, the possibilityfortalentedpersonsto
commandboth verylarge marketsand very
largeincomesis apparent.
A theoryof the assignmentof buyersto
sellersis requiredto make these ideas pre-
cise. The demand and supply structureof
one such model is set forthin SectionsI and
II. The natureof marketequilibriumand its
implicationsforincomeand outputdistribu-
tions are discussed in Sections III and IV.
Comparativestaticpredictionsof the model
are sketchedin Section V and conclusions
appear in SectionVI.
4MiltonFriedmanproposed a model based on pref-
erencesforrisktaking,but did not explainwhyor how
the marketsustains the equilibriumex post with few
sellersearningenormousincomes(forexample,whythe
losers in thelotteryrestcontentwithsuch low incomes
if theyhave the same talentsas the winners).Issues of
uncertaintythat make these elementsof supply more
interesting are abstractedfromhere.A model of prizes
based on effort-incentive monitoringand the principal
agency relation is found in my article with
Edward Lazear.
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847
I. Structure
ofDemand
Imperfectsubstitutionamong quality dif-
ferentiatedgoods in the same productclass
arises fromindivisibilitiesin the technology
of consumption.No satisfactoryanalytical
specificationexistsin the literature, because
indivisibilities
lead to nonadditivitiesin pref-
erencerelationswhichare analyticallyintrac-
table.5Yet some specificmodelis requiredto
make anyprogresson thisproblem.My solu-
tion to this dilemmais to adopt a smooth
quantity-quality substitution technologyand
introducethe indivisibility througha fixed
cost of consumptionper unit of quantity.
Consumers'attemptsto minimizeconsump-
tion costs gives an extra competitivead-
vantageto higherqualitysellers.However,it
is a surprisingimplicationof the analysis
that thisformof indivisibility is not crucial
to the centralconclusions,so that truenon-
additivitieswould only strengthen the argu-
ment.
Assume the consumerhas a well-behaved
weakly separable utility function u=
u(x, g(n, z)), where x is a composite com-
modityand y = g( n,z) has the naturalinter-
pretationof consumptionof "services"of the
typein question.n is thequantitypurchased,
a measureof exposureto a seller,such as a
patientvisit,a performance, etc.; and z is the
quality of each unit of exposure.Quantity-
quality substitutionrequiresthat g(-) is in-
creasingin both of its argumentsand that
a2g/8n8z>o.
This specificationhas the virtueof being
simple,at the cost of ignoringsome details
and not being perfectlygeneral.The defini-
tionsof marketsare leftsomewhatvague: for
example,forsome purposesit is sufficient to
thinkabout themarketfornovelsas a whole
and for othersdistinguishing betweenmys-
teries,romances,and so forthis necessary.
This is simplytreatedby allowingy to be a
vector and is thereforeignored.There are
severaldimensionsto quantityin any specific
applicationwhichmightbe treatedin a simi-
5Some of the thornyissues of primitives
in problems
of productdifferentiationare discussed fromthe point
of view of the theoryof measurementby Manuel
Trajtenberg.
848 THE AMERICA N ECONOMIC REVIEW
lar manner.For example,mostpeople do not
purchasemorethanone copy of an author's
book but may buy several differentbooks
writtenby thesame author.Or theremay be
preferencesforvariety.But theseconsidera-
tionsare less thancompellingin marketsfor
professionalserviceswhere direct personal
contact between buyers and sellers is re-
quired. Preferences forvarietyper se cannot
be treatedin a quantity-quality substitution
model, and since the generalizationof in-
creasing the dimensionalityof exposure is
clear enoughin any givencase, it is ignored
too. It is doubtfulwhetherthegeneralnature
of the resultsare greatlyaffectedby these
simplifications.
A cardinal measure of quality or talent
must rely on measurementof actual out-
comes. Taken to extreme,this view would
definethe talentdistribution as the realized
outputor incomedistribution. However,that
goes too farbecause it ignoresthe fact that
more talented people typicallycommand
greatercooperatingresourcesin producing
observedoutcomesand it refersto all con-
sumersas a groupratherthan to any one of
them.The serviceflowy is a naturalpersonal
outcome measure in this case and is the
primecandidateforscalingtalent,so long as
n is heldconstantin theimputationto obtain
the rightceterisparibusconditions.Still,the
measure is stronglydependenton n unless
g(n, z) is multiplicativelyseparable.To avoid
ambiguityI restrict g(n, z) to theformzf(n),
so that relative talent is defined indepen-
dently of n (since y is the product of a
functionof n and another functionof z,
talentcan alwaysbe rescaledto be the func-
tionof z itself,forexample,ify =Jf(z')f2(n),
changethescalingofz' bydefiningz -fi( z')).
The propertiesof f(n) play no important
role in this analysis,so it is assumed to be
linear.Therefore y=nz, whichis thefamiliar
efficiency units specification.This is a very
strongformof substitutionwhichobviously
works in the directionof spreading sales
aroundall qualitiesof sellers,not concentrat-
ing them among the top, and is a weak
specificationin thatsense.
The cost of one unit of serviceof a given
qualityis its pricep(z) plus a fixedcost s.
For example,if each unit requirest hours
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DECEMBER 1981
and the wage rate is w, thens -tw. Measur-
ing pricesin unitsof x, thebudgetconstraint
is
(1) I=x+(p+s)n
-x+ [(p +s)/z] y=x+vy,
whereI is fullincomeand v is the fullprice
of servicesdirectlyimpliedby themultiplica-
tive specificationy nz (hereinlies the ana-
lyticalvalue of thatassumption).
Marginal conditionsfor consumerchoice
are
(2) uY/ux=dp(z)/dz forz;
UY1/ux=(p+s)/z forn.
Combiningthesetwo,choice of z solves
(3) dp/dz=p'(z) = ( p+s)/z.
Choice of n followsfromthe requirements
that the marginal rate of substitutionbe-
tweeny and x equals the relativemarginal
cost v=(p+s)z. The schedulep(z) is the
same forall buyers.It maps the talentof a
seller into the unit price charged for that
quality of service.Thereforeoptimal choice
of z in (3) dependsonlyon s and not on the
formof theutilityfunctionunderthesepara-
bility assumption. Condition (3) balances
larger directcosts of greatertalent against
largerindirectcosts of greaterquantityand
lesser talent. For example, customerswith
largers prefermoretalentedsellersto econo-
mize on consumptiontimein this specifica-
tion.Finally,all effectsof intensityof prefer-
ences are absorbed in choice of the quantity
consumed, given the optimum value of z
determinedby condition(3).
Because it plays an importantrole in the
analysis below, suppose the equality in (3)
held forall possible values of z, notjust for
one of them. Evidentlythat occurs only if
p(z) happens to followa definitefunctional
form;the one satisfying (3) interpreted as a
differentialequation for all z. Integrating
and simplifying equation(3) yields
(4) p(z)=vz-s.
The fullpricev is theconstantof integration,
VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS 849

sincev=(p+s)/z by definition. If market mies reflecta typeof degradationof services

pricesline up as in (4), the consumeris a sellersupplies to each of his customersas
indifferentamongall valuesofz thatappear the numberof contactsexpands. There are
on themarket, since(3) is an identity.
There- two fundamental reasonsforthis:
fore(4) mustbe a price-talent indifference First,in cases whereduplicationis pos-
curve,an equalizingdifference function, sible, marketexpansion ultimatelyrequires
showing themaximum amountthecustomer using inferior techniques to render the
is willingto payforalternative valuesofz at service.It is preferableto hear concertsin a
a givenutilityindex.The largeris v, the hall of moderatesize ratherthan in Yankee
smallertheutility index.Finally,if (4) does Stadium. Recordingsare a superiorway of
in facthold truein the market,too, then reachinga largeaudience,but are inferiorin
bothequationsin (2) reduceto uy/u,-v, so quality to live performanceswith smaller
thaty is uniquelydetermined forthe con- audiences. Furthermore, manyof the activi-
sumereventhough z and n arenot. ties in question involvecertaincreativeele-
ments so the ultimate negative impact of
ofSupply:
II. Structure and
External marketsizes sometimescan be interpreted as
Diseconomies
Internal the effectof overexposureand repetition.
Second, the analysisshould not be con-
The economicactivities underconsidera- strainedto only those activitieswheresome
tion invariablyinvolvedirectcontactof formofcloningis possible.The generalmodel
buyerswiththesellerin onewayor another. also applies to cases of one-on-onebuyer-
If a competitive market waseverimpersonal, seller contact, as is true of professional
thissurelyis not it. The seller'schoiceof services.Here thenegativeeffectsof personal
market size(volumeoftransactions) amounts marketscale are caused by limitationson the
to determining the numberof contactsto seller's time. As a doctor's patient load in-
makewithbuyers.In manycases the tech- creases, the amount of direct contact time
nologyadmitsa certainkindof duplication available to any person decreases, waiting
in whichthesellerdeliversservices to many timebetweenappointmentsand in the office
buyerssimultaneously, as a formof joint increases,and so forth.Neverthelesspatients
consumption. Once theauthortellshis tale may be willing to trade off service time
to the publisher, it can be duplicatedin againstqualityof serviceper unittime.
writingas manytimesas desired.A per- In both cases the qualityof servicez that
former appearing on televisionliterallyclones appears in consumers'preferencesis itself
his performance to whomever happensto producedby both thequalityand size of the
tunein. The servicesrendered by anyseller marketof the sellerwithwhom transactions
becomemorelikea kindof publicgood the occur: z=h(q,m), where q is an index of
morenearlythe technology allowsperfect seller talentor quality and m=m(q) is the
duplication at constant cost. totalnumberof unitssold by a sellerof type
to findpracticalex-
Justas it is difficult q. The argumentsabove implyaz/aq=hq >0
amplesof pure publicgoods in publicfi- and az/am hm<O. Furthermore, I assume
nance,so tooitis difficult to findthemhere. that hqm>0: superiortalentstands out and
In factservices of thistypeareanalogousto does not deteriorateso rapidlywithmarket
local publicgoods,due to ultimatelimita- size as inferiortalentdoes. The importance
tionson joint consumption economies.To of thisassumptionwill emergelateron.
theextentthatthetechnology is subjectto Preferences are structuredon serviceflows,
congestion, thatis, to external diseconomies whichin turndepend upon q and m. There-
of scale,therequired analytical apparatusis forep =p(q, m) is theunitpricechargedby a
thetheory ofclubsratherthanthetheory of sellerof qualityq sellingm units. Competi-
purepublicgoods.6Theseexternal disecono-
original referencein the theoryof public finance is
6That a doctor'spatientsor a performer's
fansmight JamesBuchanan.Eitan Berglasand Berglasand David
be consideredas a club has intuitiveplausibility.The Pines,presentelegantdevelopmentsof thatmodel.

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850 THE AMERICA N ECONOMIC RE VIE W
tion in the marketfor servicesimplies that
the functionp(q, m) is taken as given by a
seller.This marketis competitiveeventhough
a seller affectsthe unit price charged by
choosing m. The reason for competitionin
marketsof this type is that each seller is
closely constrainedby othersellersoffering
similarservices.Though sellersof different
quality are imperfectlysubstitutablewith
each other, the extent of substitutionde-
creases withdistance.In the limitveryclose
neighborsare virtuallyperfectsubstitutes.
Assume there is a regular distributionof
talentin thepopulation4(q)dq. Then poten-
tial substitutionis generatedby both the
density4 in theneighborhooddq of q and by
degradationthroughlarger market size of
betterqualitysellerssome distanceabove q,
and the opposite for those some distance
below q.
In addition to marketsize effectson de-
mand, the otherfactorinfluencingthe out-
put decisionis directcost of production.Let
C(m) be out of pocketcosts of producingm
units,withC'>O and C">O. Thereare non-
decreasing(marginal)costs of production-
internal diseconomies-for the usual rea-
sons, includingthe fact that here the seller
must work harder as m increases.Assume
also thatall sellershave opportunitycost K
of workingin thissectorcomparedwiththe
next best alternative,with K independent
of q.
A sellerof typeq chooses m(q) to maxi-
mize netrevenue
(5) R(q)=p(q, m)m-C(m).
Thereforem(q) is chosen to satisfy
(6) mpj(q,mn)+p (q, mn)-C'(m ) =O
so long as
(7) 2pm+mpmm-C <O
and R exceeds K. Equation (6) determines
theintensivemargin.If R(q) is monotonein
q, then free entrydeterminesan extensive
marginas well; the value of q, denoted q,,
whichsatisfiesboth R(q,)-K and (7) simul-
taneously.
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DECEMBER 1981
In contexta moreelaboratereturnspecifi-
cationdecomposestheinternalmarginabove
into two additional components,one being
thesize of each act ofjoint consumption,
mi,
and theotherbeingthenumberof such acts,
M2. In thatcase the revenuefunctionis
(8)
m2[m1p(q,m ,m2)-C C(mI)] -C2(m2)
where m1p - C1 are the "gate" receiptsfor
each eventand C2(m2) is thecost of increas-
ing the numberof events.This avoids some
of the dimensionality or unitsambiguitiesin
(5), as noted in Section I. If all external
diseconomiesresidein ml alone and not m2
(so thatp=p(q,ml)), then(8) and (5) have
very similarimplications;only the disecon-
omy associatedwitheach eventis somewhat
overcomeby expandingtheirnumberin for-
mulation (8). This carries over to a case
wheretheexternaldiseconomyof m2 iS small.
Otherwise,preciseresultsdepend on whether
the effecton performanceservicesof ml are
strongerthanthoseof m2 and on theirinter-
action. It is simplestto merelythinkof m in
(5) as the productof ml and m2, in those
cases where this type of decompositionis
applicable.
III. MarketEquilibrium
A complete closed market solution is
available if all buyershave the same fixed
cost s, though possibly differentmarginal
ratesof substitution betweeny and x. In that
case it is possible to aggregatetotal services
in a single market,with a unique implicit
marketprice v which contains all the rele-
vant informationand acts as a "sufficient
statistic."The unitpricep chargedby a seller
of type q is then constrainedto follow(4)
independentof market supply conditions.
Thoughn and z are not uniquelydetermined
for any consumer,each one has a regular
demand functionfor servicesy which de-
pends only upon v. These demands in turn
can be summedacross consumersto obtain
thetotalmarketdemandforservices2y= yd
= F(v). Since consumersare indifferent be-
tween n and z, the compositionof services
between qualities and quantities are de-
VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS
terminedcompletelyby sellers,who maxi-
mize profitaccordingto condition(6). Indi-
vidual supplychoicesmaybe aggregatedtoo,
this timeby integratingthe optimumvalue
of zm, the total servicesa seller supplies to
the market,over thosevalues of q whichare
actually found in the market,weightedby
the numberof sellersof typeq, +(q). This
sum representstotal servicessupplied to the
market,Y' = G( v). The intersection of supply
and demand determinesv itself.Given this
equilibrium,the internalcross-sectionprice,
output,and income distributionalstructure
may be examinedin detail.
To findthe supplydecision of each seller
at a given value of v, substitutez=h(q,m)
into the equalizing differencefunction(4).
Applying(6) and (7) yields
(9) vmhm(q,
m)+vh(q, m)-s-C'(m)=O;
(10) 2vhm+vmhmm-C1<O.
Differentiate
(9) withrespectto q:
(11) am/aq=-v(hq+mhqm)
-C")>O.
/(2vhm+vmhmm
Marketsize increaseswithq if hqm> 0. Next
differentiatenet revenue R(q) in (5) with
respectto q, at its maximizedvalue. By the
envelopeproperty
(12) R'(q)=vmhq>0.
Net revenueis monotonicallyincreasingin
talent,sincehq>O. Finally,differentiate
(12)
withrespectto q and simplifyto obtain
(13)
R"(q)=v(hq+mhqm)(am/aq)+vmhqq,
wheream/aq is definedby equation(11). So
long as hqq is not sufficientlynegative,re-
ward is convexin q.
The marketsupply of services is easily
calculated.Let m(q; v) be thesolutionto (9).
Then the amountof servicesupplied to the
market by a seller of quality q is
h(q,m(q;v))m(q;v) and the total amount
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851
suppliedto themarketby all activesellersis
00
YS(v)f h(q, m(q; v))m(q; v),p(q)dq,
q1(v)
where q,( v) is the extensivemargin. Dif-
ferentiate
withrespectto v:
dYsldv= - h(q,, m')m',O(q,)(dqldv)
0rm( 8h a]( m
+q hl 1+ h Om)](a (q)dq,
1 h\ 8m] \ v N~qc,
where ml= m(q,; v). Condition (9) implies
that 1 + (rm/h)hmis positive.Thereforethe
second (integral)termin dY/dv is positive.
The factthatR is increasingin both q and v
from(12) impliesthatdq,/dv<O, so thatthe
firsttermis positiveas well. Hence thereis
risingsupplypricein theservicemarket.It is
obvious fromSection I that thereis falling
demand price forservices,so a conventional
equilibriumis obtained and v is uniquely
determined.
A. InternalDiseconomies
The cross-sectionstructureof the market
equilibriumis most easily establishedin the
case wherethereare no effectsof a seller's
marketsize on servicequality.7In that case
m is not an argumentof h(-) and talentis
scaled so that z=h(q)=q. Now the model
has a Ricardianflavor,withdifferential rent
sustainedby talent induced product differ-
entiation.
Since z q theunitpricechargedby sellers
of talentq is increasinglinearlyin q at ratev,
from(4); and since price is higherfor the
better sellers and cost conditions no less
favorable,moretalentedsellersproducemore
and have largermarkets.8 Applicationof (1 1)
7This versionof the model has a strongfamilyre-
semblanceto a class of problemspreviouslyconsidered
in my 1974 article.
8Throughout thispaper I make theusual club theory
assumptionsand ignoreindivisibilities requiringan in-
tegernumberof sellers.This can be problematicwhen
thenumberof sellersis verysmall,and raiseswell-known
problemsin industrialorganizationabout whichI have
nothingto contribute.The magnitudeof the rentof the
lowest rentseller (extensivemargin)is the issue. That
mustbe sufficiently small forthisanalysisto apply.
852 THE AMERICAN ECONOMIC REVIEW DECEMBER 1981

to thiscase yieldsam/aq=v/vC">O.From p

(12), R'(q)=vm>O, and R"(q)-v2/C">O,

from(13). Not only does rentrewardin-
N=N(p;q)
creasein talent,but marginalrentreward
increasesin talentas well.R(q) is convex
becausebothpriceand quantity increasein
q. To see thepowerful forceof convexity in
producingskewness,consideran example
wheres=0 and C(m) is quadratic.Then
mcxvqand bothpriceand quantity increase
linearly in q. Therefore,revenueincreasesin
thesquareofq. In factRCv2q2/2. A person
who is twiceas talentedas anotherearns
fourtimesmoremoneyin thisexample.9
Thiscase is important in showing thatthe p1 a pN-K

tendency towardskewedrewards arising from

convexity of revenues holdsunderverygen-
eralcircumstances: individualswho,byvirtue N

of superior talentand abilityin an activity, FIGURE 1

can sell theirservicesforhigherpriceshave
strong incentives to producemoreso longas
costsarenotperfectly correlated withtalent. is themosttalentedof all potentialsellers.
The increasein bothpriceand quantity with Even thoughthereis one seller,essentially
qualityimpliesthattalenthas a multiplica- competitivemarketconditionsare main-
tiveeffect on reward.It is surprising thatthe tainedby threats ofpotential entry.
tendency towardskewedrewards is notnec- Let N=N(p,q) denotethe totalmarket
essarily dependent on indivisibilitiesand oc- demandforquantity at pricep and talentq.
cursin thelinearefficiency-units case, per- If therewereseveralpotentialsellersof the
haps the weakest possible specification. sametalent,onlyone of themis requiredto
However, no relativeskewis impliedin the providetheservice so m-N. This
efficiently,
distribution of outputin thiscase because is seenin Figure1. Free entryimpliesthat
thereareno interactive effectsin thatdimen- totalrevenuepN mustbe drivendown to
sionoftheproblem. opportunity cost K in equilibrium.This
equation,pN=K, is the rectangular hyper-
B. PureJointConsumption bola in Figure1. It is competitive supply
price.Marketequilibrium occurswherede-
The effectof scaleeconomy on sellercon- mandintersects supplyfromabove.Suppose
centrationis strikinglyseen in theextreme thesellerwereto chargepricep . Thenthe
case wheninternaland externaldisecono- valueof sales exceedsK and rentsare non-
miesvanish,whenC(m) O (nonzerocon- zero. Therefore anothersellerwould enter
stantmarginal costswilldo also) andhm 0, and chargea slightly lowerprice,attracting
so z=h(q)=q. Thenthereliterally is public all businessawayfromtheinitialseller.By
goodstechnology and a singlesellerservices continuation, pricemustbe drivendownin
thetotalmarket in equilibrium.Thatperson equilibrium to p*, rentsare drivento zero,
thereis one sellerand potentialentrymain-
9The twofunctions m(q) and R(q) are the trans- tainsthatsituation indefinitely.
forms from thedistribution
ofabilityto thedistribution Whathappenswhensellershavedifferent
of outputand reward.Inverting and computing the talents?The demandfunction facinga more
Jacobians, thedistribution
of outputis (l/v)4(m/v), able selleris differentfromtheonein Figure
the same formas the distribution of talentbecause
m(q) is linear. The distributionof rent is I because q is an argumentof demand,
(v(8R)'/2)4((2R/v)'/2), whichis skewedto theright N( p, q). Whether Nq is positiveor negative,
relativeto4'. less talentedsellersare drivenout of the

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VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS
market. To see this, note that R(q) =p
N( p, q) in thiscase. Therefore
(14) R'(q)=N[l +( p/N)aN/ap]ap
/aq+p(aN/aq).
Given the structure of demand above, equa-
tion(4) impliesthatap/aq=v. Furthermore,
it is easy to show thatthe price and quality
elasticitiesof demand for quantitiesare re-
lated to the fullpriceelasticityof servicesas
follows:
(p/N)aN/ap=O(v/Y)aY/av,
(q1N)aN1aq= - [I + (V/Y)ay/av],
where0=p/( p+s) is the shareof fullprice
accountedforby nonfixedcosts and Y=Ey
withthe sum extendingover individualcon-
sumers.The qualityelasticityof demand for
quantityis negativeif the fullpriceelasticity
of demand for services is inelastic. Sub-
stitutingthese relationsinto (14) and sim-
plifyingyields
(15) R'(q)=Nv(l-0)>O.
Considerthe followingtwo cases:
(i) Assume+(q) is dense on theinterval
[qo,q], whereqo is the least talentedand q
the most talentedpotentialseller. Equation
(15) showsthatR is increasingin both q and
v. For a givenvalue of v all sellersforwhom
R(q)-K>O wouldchoose to enterand, since
R'>O, theymustbe selectedfromthe upper
tail of 4(q). But in equilibriumthereis only
one seller.Thereforev must adjust so that
R(q-)-K=O and all people forwhom q<q-
rationallychoose the alternativeoccupation.
There is no rent in equilibriumwhen 4 is
dense even though there is a single seller,
because someoneis waitingin thewingswho
is imperceptably different fromthatsupplier.
(ii) Assume +(q) basically the same as
before, with the addition of outlier q* a
finite distance - above q: q* =q-+ . The
Superstaris perceptablydifferentfromthe
closest rival and earns rent on this unique
talent.Now it is q* who suppliestheservice.
Equilibriumv mustbe slightlysmallerthan
in case (i) so that people for whom qjq-
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853
p
P3
vh(q2, m)-s
vh(ql,m)-s
ml m2 m3
FIGURE 2
choose not to compete.q* chargespricep*
vq* -s (see equation (4), whereas q- would
chargep-= vq--s. The pricedifferential
p* -p
=v? is theunitrentaccruingto q*. This is a
small numberif - is small.Yet the totalrent
receivedby q* is Nve, which can be very
largeifN is large.Thoughunitrentis limited
by the equalizing difference(4) and the
supply(distance) of close competitors,scale
economiescan make total rentverylarge in
equilibrium.'?
C. ExternalDiseconomies
External diseconomiessupport a nonde-
generateequilibriumdistributionof sellers.
The spatial structureof the market is il-
lustratedin Figure 2. Given the marketfull
pricev, priceschargedby sellersof different
talent must satisfy (4) and z= h(q, m).
Thereforea sellerof talentq mustsolve the
followingconstrainedmaximumproblem:
(16) max [ pm-C(m)]
m
subjectto p =vh (q, m) -s.
'0The equilibriumconcept used in this particular
example is the same as the notion of sustainabilityin
naturalmonopoly.The equilibriumin Figure 1 is ineffi-
cient.This inefficiency
vanisheswhen the externality is
bounded sufficientlyby eitherinternalor externaldis-
economies.Those bounds are implicitlyassumed in all
otherportionsof thispaper.
854 THE AMERICA N ECONOMIC RE VIE W
To examine the pure effectof externalities
assume no internaldiseconomies,C( m)-O.
Two familiesof curvesare shownin Figure
2, one correspondingto the objectivefunc-
tion,and theotherto theconstraintat alter-
nativevalues of q. A sellerof giventalentq,
is constrainedby both consumerpreferences
and sellersof othertalentsto chargeprices
along the curve-markedvh(q1,m) - s; seller
q2 is constrainedby the presenceof q, and
othersto operatealong vh(q2m)- s, etc. The
isorevenuecurvesare rectangular hyperbolas.
Points of tangencybetween the two repre-
sentthesolutionto (9) and (10) or to (16) for
each value of q. Thus q1 chargespricep1 and
has a marketsize mi; q2 chargesP2 and sells
M2 units,etc.
The importanceof thecrowdingcondition
hqm>0 is now apparent.Since the services
produced by more talentedsellers are less
contaminatedbycrowding,thequantity-price
gradientgrowsas talentincreases.Therefore
the bettersellerscan and do handle much
largercrowds in equilibrium.Equation (11)
demonstratesthat the marketsize gradient
increaseswithq whenhqmis positive.To see
what effectthis has on prices,differentiate
theconstraintin (16) withrespectto q:
(17) dp/dq=vhq +vhm(am/aq).
The firsttermis positive,but the second is
negativeif am/aq>O, which it must be if
hqm>O. The extracrowdingand dilutionof
unit serviceof highqualitysellersconstrains
unit pricesfromrisingwithqualityas much
as they would withoutit. Figure 2 shows
marketsize increasingwithqualityto a much
largerextentthan the price-qualitygradient.
It is definitely
not irrationalforbettersellers
to have a greatdeal of business,but prices
that are not much higherthan those with
lessertalents.The marketmayimpelthemto
act thatway, to become relatively"crowded
out" in equilibrium.
Withonly internaldiseconomies,the mul-
tiplicativeeffectof both positiveprice and
quantity gradientswith respect to quality
impliesconvexityof thereturnfunctionR(q).
In thiscase thequantitygradienttendsto be
larger and the price gradienttends to be
smaller.Nevertheless, thereare strongforces
workingtoward convexity.Substitute(11)
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DECEMBER 1981
into (13) to obtain
(18) R"(q)= v2(hq+mhqm)2
1(2vhm+vmhqm-C") +vmhqq
Since thefirsttermin (18) is positive,R(q) is
convex so long as hqq is not sufficiently
negative. In fact, given the caveat about
hqq,R"(q)>O independentof the sign of
hqm-When hqm<O theconstraint functionsin
Figure2 become steeperas q increases,tend-
ing to stretchout the equilibriumprice-
quality gradientand to compressthe quan-
tity-qualitygradient,just the opposite of the
case wherehqm>O. Symmetry of the reward
functionin p and m implies similarityof
R(q) in eithercase.
The effectsof externaldiseconomiesare
illustratedby the followingexample.Let z =
h(q,m)=q-a(q/m) b where a and b are
constants.Here adulterationdepends on the
talent-audienceratio and the unadulterated
servicesatisfiesz =h( q,O)=q. Assumings-=
0, it is readilyverifiedthatp(q) is propor-
tional to q, m(q) to q+ l/b and R(q) to
q /b. Suppose b = 1. Then p is linearin q,
m is quadraticin q, and R is a cubic in q. A
seller thatis twiceas talentedhas a market
thatis fourtimeslargerand earnseighttimes
more money. If b = 1/2 marketsize grows
with the cube of talent and incomes by
powers of four: a seller who is twice as
talentedearns sixteentimesmore,but only
chargespricesthatare twiceas large."
IV. Heterogeneous
Consumers
Consumer differencesin intensityof de-
mand forservicesare unrestrictedin Section
III, thoughmuchuse is made of the assump-
tion that s is identical among them. How
" Notice thatwithimperfect informationtheeffectof
a reputationand fixed costs creates a type of scale
economywhichbroadensthescope of thisresult.If two
scholars writeon the same subject, the one with the
bettertrackrecordis much more likelyto be read and
subsequentlycited. Similarly,a firmwithrafinereputa-
tionis morelikelyto get thebusinessthanone thatis of
unknownquality.While a reputationhas many of the
elementsof a public good, the analogy is not quite
completebecause this discussionignoresthe dynamics
ofhow reputations are established.An "epidemicmodel"
is an intriguingpossibility.
VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS
should the equilibriumbe describedwhen s
is distributedin thepopulationof customers?
That analysisis morecomplexbecause there
is no longera singleequilibriummarketprice
forservices,v, thatsummarizesall theinfor-
mation.Nevertheless, differencesin s imply
restrictionson marketoutcomesthatactually
strengthenthe qualitativeresults.I do not
attempta fullanalysishere,but thereasonis
that the marketassignmentof customersto
sellersmay forcethe relationshipbetweenp
and z to be convex. Thereforethe more
talentedsellersreceiveeven greaterrentsand
serviceeven largermarketsthan when p is
linearin z as in (4).
Thatp(z) mustbe convexcan be sketched
as follows: Figure 3 shows the equalizing
differencefunction(4) for two types of
customers,s1 and S2, at alternativevalues of
v. Each line represents thewillingnessto pay
for z at a given utilityindex. At the same
value of v the functionsare parallel and s1
typeconsumersoutbid s2 typesat all values
of z. In equilibriumtherelevantv (the nega-
tive of the utilityindex) for type s2 must
exceed thatfortypesP. Otherwisetheformer
groupwould not purchasethe serviceat all.
Consequentlythe observed marketrelation
must be the envelope of functionssuch as
p = v1z-s 1 and p = v2z-s2, theheaviercurve
in Figure 3. The envelope is convex. Evi-
dentlythemainfeaturesof theanalysisabove
hold foreach linearpiece ofp(z) in Figure3.
There are, however,additional implications
of sorting between segments. First, the
more talentedsellers gravitateto that seg-
ment of the marketwith the largestvalue
of v, precisely the reason why the con-
vexityimplicationsof the previousanalysis
are strengthened.Second, consumerswith
smallervalues of s buy fromless talented
sellers.This is quantity-quality substitution
at work:buyerswithsmallervalues of s find
quantity relativelycheaper and economize
on quality,whilethosewithlargevalues of s
demand greaterquality and economize on
quantity.Adding more types of consumers
smoothsthe locus of equilibriumpoints in
Figure 3 withoutaffectingthe generalprin-
ciples.'2
12Reder points out that the market is less con-
centratedif thereare differences
of opinion on who is
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855
P=V2 Z-S2
P=V1 Z-S1
> /P=Vl~~V,Z_S2
z
-Si
-S2
FIGURE 3
V. Comparative
Statics
Since Section IV indicatedthat the quali-
tative resultsare not affected,it is conven-
ient to exploitthe assumptionof commons
in the consumingpopulation. Demand and
supplyshiftsare consideredin turn.
A. DemandShifts
An increasein the numberof consumers
or in the intensityof theirdemands fory
increases the marketdemand for services.
Marketequilibriumpricev risesdue to rising
supplyprice. Hence unit prices,p(q), of all
sellersincreases.Since R(q) increasesevery-
where,less talentedpeople enter.At thesame
time,existingsellersexpand theirscales of
operations.Thoughaveragequalityof sellers
falls,all previousentrantsearn largerrents
than before,and the largestincreasesaccrue
to themosttalentedpersons(see theeffectof
v in equation (13) or (18)). Thereforethe
distributionof rewardbecomesmoreskewed
thanbefore.
The importantpracticalimplicationis that
it is monetarilyadvantageousto operatein a
largeroverall market;and it is increasingly
advantageousthe more talentedone is. No
the most talented.This raises subtle questions of the
definitionof markets that remain to be solved. An
approximatesolutionin theanalysishereis to adjust the
densityof +(q): if severalsellersare thoughtby differ-
ent customersto have thesame value of q, thatis nearly
the same as moremass in p at thatvalue.
856 THE AMERICAN ECONOMIC REVIEW
wonderthat the best economiststend to be
theoristsand methodologists ratherthannar-
row fieldspecialists,thatthe best artistssell
theirworkin thegreatmarketsof New York
and Paris, not Cincinnati,or that the best
writersare connectedwiththe primaryliter-
ary centerssuch as New York or London.
The best doctors,lawyers,and professional
athletesshould be foundmore frequently in
largercities.For a givenplace in the distri-
butionof talent,it is more lucrativeto be a
violinistthan an accordianist,a heavyweight
thana flyweight, a rockmusicianthana folk
singer,a tennisplayer than a bowler,or a
writerof elementarytexts rather than of
monographs.
B. SupplyShifts
The interesting experimentsare changesin
internaland externaldiseconomies.Lesser
diseconomiesincreasethe marketsupply of
services,reduce the equilibriumvalue of v,
and make consumersbetteroff.The effects
on the distributionsof talentsand rentsare
less obviousand complicatedby thepresence
of two opposing forces: the reductionin v
lowers unit prices of all sellers, tending
to decrease individual output and reward;
whereasthe reductionin costs or congestion
tendsto increasethem.The balance between
the two dependson the elasticityof demand
forservices.
If demand forservicesis sufficiently
elas-
tic, then cost reducingeffectsswamp the
decline in unit prices and rents of sellers
increase. The rent-talentgradientincreases
as well and thereis greaterconcentrationin
the distributionof rewardsamong the most
talented.A reductionin theinternaldisecon-
omy induces entryat the extensivemargin,
and the averagesellerbecomesless talented.
However, a reductionof the externaldis-
economy,if large enough, can actually re-
duce the numberof sellers,kickingout the
less talentedand increasingtheaveragequal-
ityof thoseremaining.If demandis inelastic,
thenthenumberof sellersdeclinesand, since
thoseleavingare selectedfromthelowertail,
the average remainingtalent rises. Effects
on the returnfunctionR(q) are ambiguous
in this case, thoughsufficientreductionsin
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DECEMBER 1981
the costs of congestionstill can imply in-
creases in both R(q) and R'(q). However,
that is a less likelyoutcome than when de-
mand is elastic.
The practicalimportanceof all this is re-
lated to technical changes that have in-
creased the extentof scale economies over
timein many activities.Motion pictures,ra-
dio, television,phono reproductionequip-
ment,and otherchangesin communications
have decreased the real price of entertain-
ment services,but have also increased the
scope of each performer's audience. The ef-
fectof radio and recordson popular singers'
incomes and the influenceof televisionon
the incomes of news reportersand profes-
sional athletesare good cases in point. And
thereare finegradiationswithinthese cate-
gories.Televisionis evidentlya more effec-
tive medium for American football and
basketball than it is for bowling,and in-
comes reflectit. Nonetheless,televisionhas
had an enormousimpacton the incomesof
the top bowlers,golfers,and tennisplayers,
because theirmarketshave expanded. The
"demise"of the theatreis more a complaint
about competition from the larger scale
media; and incomesof thetop performers in
the theatre,motion pictures,and television
certainly are closely geared to audience
size. These changes are not confinedto the
entertainment sector. Undoubtedly,secular
changes in communicationsand transpor-
tation have expanded the potentialmarket
forall kindsof professionaland information
services,and allowed manyof the top practi-
tionersto operateat a nationalor even inter-
nationalscale. Withelasticdemands thereis
a tendencyfor increasingconcentrationof
incomeat thetop as well as greaterrentsfor
all sellersas thesechangesproceedovertime.
C. Interactions
A changein s shiftsthesupplyof services,
not demand, even thoughit is a consumer
parameter.This has no counterpartin stan-
dard theory.Demand is not directlyaffected
because v embodiesall relevantinformation
for the consumption decision. Supply is
shiftedbecause s affectsunitprices(see (4)).
An increasein s reducesunit prices at any
VOL. 71 NO. 5 ROSEN: ECONOMICS OF SUPERSTARS
value of v and reducesmarketsupply.There-
foretheequilibriumserviceprice v increases
and the rentdistributionis alteredin favor
of themoretalentedsellers.The less talented
leave the market.Both the increasein aver-
age qualityof sellersand greaterconcentra-
tion in rewardsat the top reflectcustomers'
substitution of qualityforquantityas s rises.
Since importantcomponentsof s are time
and effortcosts,time-series changesare cor-
related with consumer earnings.Therefore
marketdemand increasesat the same time
that supplyis reduced,resultingin an even
greaterincreasein v and additionalskew. It
can even push the extensivemargindown
rather than up. The incentivesfor invest-
mentsin timesavinginnovationsthattendto
reduce s as earningsrise, forexample,con-
sumptionat home,have been well remarked
upon in theliterature.'3
VI. Conclusion
In discussingthe generalinfluenceof eco-
nomic progresson value, Alfred Marshall
wrote:
The relativefall in the incomes to be
earned by moderate ability... is ac-
centuatedby the rise in those thatare
obtained by many men of extraor-
dinaryability.There neverwas a time
at whichmoderatelygood oil paintings
sold morecheaplythannow,and ... at
whichfirst-rate paintingssold so dearly.
A businessman of averageabilityand
averagegood fortunegetsnow a lower
rate of profits...than at any previous
time,while the operations,in whicha
man exceptionallyfavouredby genius
and good luck can take part, are so
extensiveas to enable him to amass a
large fortunewith a rapidityhitherto
unknown.
The causes of this change are two;
firstly,the general growthof wealth,
and secondly,the developmentof new
facilitiesfor communicationby which
men, who have once attained a com-
mandingposition,are enabled to apply
their constructiveor speculative ge-
13See Becker(1965).
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857
nius to undertakingsvaster, and ex-
tendingover a wider area, than ever
before.
It is the firstcause... that enables
some barristersto commandveryhigh
fees,fora richclientwhose reputation,
or fortune,or both, are at stake will
scarcelycount any price too high to
secure the servicesof the best man he
can get: and it is thisagain thatenables
jockeys and paintersand musiciansof
exceptional ability to get very high
prices... . But so long as thenumberof
persons who can be reached by a hu-
man voice is strictlylimited,it is not
verylikelythatany singerwill make an
advance on the ?10,000 said to have
been earned in a season by Mrs.
Billingtonat the beginningof the last
century,nearlyas great as that which
thebusinessleadersof thepresentgen-
erationhave made on thoseof thelast.
[pp.685-86]
Even adjusted for 1981 prices, Mrs.
Billingtonmust be a pale shadow beside
Pavarotti.'4Imagine her income had radio
and phonograph records existed in 1801!
What changesin the futurewill be wrought
by cable, video cassettes,and home com-
puters?
"The entriesforElizabethBillingtonin theeleventh
editionof theEncyclopediaBritannicaand Grove'sMusi-
cal Dictionaryindicate that she earned somewherebe-
tween ?10,000 and ?15,000 in the 1801 season singing
Italian Opera in CoventGarden and DruryLane. She is
reportedto have had an extraordinary voice and was
highlypaid throughout herprofessionallife,but thereis
a hintthatthe 1801 sum was unusual even forher. No
information is givenon endorsements.
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J. M. Buchanan,"An Economic Theory of
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