Canadian Public Policy

Formulating Cost and Output Policies in the Performing Arts

Author(s): Steven Globerman and Sam H. Book
Source: Canadian Public Policy / Analyse de Politiques, Vol. 2, No. 1 (Winter, 1976), pp. 33-41
Published by: University of Toronto Press on behalf of Canadian Public Policy
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 Formulating CostandOutputPolicies
in the PerformingArts*
STEVEN GLOBERMANand SAM H. BOOK /
Facultyof Administrative
Studies,YorkUniversity

The paperpresentsan economic analysis of pricingand productionrelationshipsfor

professionalperformingarts companies. The analysis is primarilybased upon the
resultsof an empiricalexaminationof cost functionsin the performingarts. Production
trade-offsamong a numberof output variables(length of season, ratio of home to
touringperformances,performancediversity)as well as the issue of economies-of-
scale areinvestigatedby meansof a cross-sectionanalysisof costs andoutputfor sixty
Canadianperformingarts companies. Policy implicationsof the empiricalstudy are
related to governmentsubsidy patternsin the arts and, specifically,to the issue of
decentralizationof artisiticactivity.

Ce texte presente une analyse economique des relationsentre les prix, les coiits et
l'outputdes entreprisesprofessionnellesceuvrantdans le domainedes artsdu specta-
cle. Cette analyseest fondee sur les resultatsd'unexamenempiriquedes fonctionsde
cooitde ce domaine.Les effets sur la productionde certainesvariablescomme durie
de la saison, le rapportentre representationslocales et representationsen tournee, la
diversit6des representationssont examinees, de memeque les questionsd'economie
d'echelle, au moyen d'analyseen coupes instantandesdes cooitset de la productivit6
de 60 entreprisescanadiennesceuvrantdans le domainedes arts du spectacle. Les
implicationsde cette etude empiriquepour la pratiquedu gouvernementrelativeaux
subsidesallouesaux artset plus au problemede la decentralisationde
artistiquesont particuli.rement
explicitees.
l'activit6

INTRODUCTION

The production activities of Canadian performing arts groups,' as well as

other government subsidized organizations, can be described as processes by
* Thepaperhasbenefitted fromthecomments
substantially of twojournalreferees.Theauthors
alsoacknowledge theassistanceof NormanLamontof theCanadaCouncilinproviding neces-
sarydata.
I Performingartsgroupsare heredefinedas theatrecompanies,symphonyorchestras,opera
companies,balletandmoderndancegroups.Companies thatpresentliveperformancesto the
CANADIAN PUBLIC POLICY-ANALYSE DE POLITIQUES, II: I
1976 PrintedinCanada/Imprime
winter/hiver auCanada

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 34 / Steven Globermanand Sam H. Book

whichcompaniesattemptto achieve given objectiveswithinconstraintsfixed

by the size of government subsidies. Productionof a particularlevel and
quality of output, provision of this output over differenttime periods, de-
velopmentof differenttypes of output, and other productionobjectives are
attained to the degree allowable by each company's governmentgrant or
subsidy.
Outputobjectivesof performingartsgroupsincludespecificconsiderations
such as: the numberof mainhomeperformancesofferedversusthe numberof
tourand otherauxiliaryperformances,locationandtimingof specificperfor-
mances,and the numberof differentproductionsofferedover the performing
season.2 Resources available to satisfy these objectives are derived, to a
significantextent, fromgovernmentgrantsmadeavailablefromthreelevels of
governmentto various arts groups.3 In any one year, governmentgrants
availableto performingarts groups constitute a fixed dollaramount.Over a
longer period of time, annualtotals of governmentgrants increase, but the
increasesare largelyabsorbedin meetinghigheroperatingcosts imposedon
the performinggroupsby inflationand increasingunit costs attributableto a
highly labour-intensiveindustry,with minimumopportunitiesfor increasing
productivity.
One method available to private firms for raising additional operating
revenue, namelyborrowingfundsin capitalmarkets,is not a viableoptionfor
most arts groups, since non-profit,indeed loss-making, organizationsare
precludedfromraisinginvestmentcapitalin privatecapitalmarkets.Another
way that firmscan alter net revenues is by varyingprices and the amountof
outputsold. The behaviourof the total revenueand total cost functionswith
respect to changes in outputrate determinesthe 'optimal'price-outputcom-
bination for private profit-maximizingfirms. At any existing price-output
combination,firms facing downwardsloping demand curves, which would
includeartscompanies,confrontthe followingchoice: to reduceoutput,with
a concomitantincreasein averageprice charged,or to expandoutputwith a
concomitant decrease in average selling price.4 The former strategy will

public,butdo not themselvesproduceplays, concerts, etc., (forexample,The O'Keefe Centre

andthe RoyalAlexandraTheatreinToronto)arenot includedin ourdefinitionandarenot treated
in this paper.
2 Throughoutthe paper, main performancesrefer to events in which the entire complementof
performersaffiliatedwith a groupparticipate.Other performancesincludepresentationsby a
subsetof the group'sartists.
3 The followingtablesummarizesthe extentof governmentparticipationin performingartsgroups
in the Province of Ontario, for 1972:

Professionalperforming Governmentgrants Privatedonations Earnedrevenue

artscompaniesin Ontario, as a %of total as a %of total as a %of total
1971-1972 annual expenditures annual expenditures annual expenditures

Theatrecompanies 20 3 77
Symphonyorchestras 44 12 44
Opera,ballet& dance
companies 37 16 47

4 Only the perfectlycompetitivefirmof textbooktheory, facinga horizontaldemandcurve, can

accommodatean increasein its outputwithoutreducingits sellingprice.

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 Policies in the performingarts / 35

increasenet revenueif the quantitydemandedis relativelyinsensitiveto price

changes, since total revenue will increase and total cost will decrease.5The
latter strategy can be expected to increase net revenue if the quantity de-
mandedrespondsto a change in price over the relevantprice range,and total
cost does not increaseas muchas total revenuewhen outputis increased.
Very few studies have attemptedto estimate demand curves facing live
performingarts groups. The fragmentaryevidence availablesuggests that in
the long run the response of demandto price changes for arts attendanceis
less than unity:6(that is, a ten per cent reduction/increasein price will bring
about less than a ten per cent increase/decreasein the quantitydemanded).
Thus, increasing the scale of ticket prices to live performancescould be
expected to generate increased revenue (both gross and net), since the pro-
portionatedecrease in the numberof tickets purchasedwill be less than the
proportionateincreasein averageticket price.
However, even if demandwere not responsive to price changes, a number
of objectionscan be levied againsta policy of raisingticket prices:
(i) Higher ticket prices would discourage arts attendance in an income-
regressive fashion; i.e., decreases in attendancewould be particularlypro-
nouncedfor younger,and lower-incomeattenders;7
(2) Whiledemandmightbe insensitiveto pricechangesfor existingaudiences,
demand conditions among current and future non-attendersmay be more
responsive;thus, highticket prices could act as a barrierto entry for the vast
publicthat presentlydoes not attendthe arts, but mightbe inducedto attend
by effective promotionalactivities;
(3) As ticket prices are increased, individualsmay become more selective in
the performancesthey attend, shunning'experimental'type performancesin
favour of presentations which have historically been well received, and
thereby leading to a serious curtailmentof the development of indigenous
writingand performingtalent.
Since, for various reasons, upward or downward adjustmentsin price
structuresare not viable meansof increasingearnedrevenue, it is realisticto
view arts groups as attemptingto satisfy a wide range of objectives with a
limited amount of financial resources. The existence of very real budget
constraintsimposestrade-offsin satisfyingthe differentgroupobjectives. For
example, the decision to provide more performancesper year mightrequire
performingarts groupsto concentrateon a more restrictednumberof differ-
ent productionsif the availablebudget is to be adequate.Another unhappy
trade-offmustbe faced between providinga greaternumberof performances
and providingmoreelaborateperformances,where 'elaborateness'is a func-
tion of scenery, costuming,and use of high-pricedperformingartists.

5 Even if the demandcurveis elastic, net revenuewouldincreaseif the decreasein totalrevenueis

less thanthe decreasein totalcost.
6 See HouthakkerandTaylor(1970)for priceelasticityestimatesfor legitimatetheatreandopera,
and Moore(1968)for a similarestimatefor Broadwaytheatre.Fisk (1963)arrivesat the identical
conclusionfor an entire categoryof recreationactivities which includesattendanceat artistic
events.
7 Severalstudiesprovideevidence that attendancefrequenciesof youngerand poorerarts atten-
dersaresignificantlymoresensitiveto pricethanis the case forolderandwealthierattenders.See
Ford Foundation (974), and Book and Globerman
(1975).

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 36 / Steven Globermanand Sam H. Book

An understandingof trade-offproblemsis relevant to arts administrators

and decisionmakersin governmentagenciesandat the individualgrouplevel.
Governmentgrantingagencies, such as the CanadaCouncilor provincialarts
councils, allocate appropriatedpublic funds to various arts groups on the
basis of different combinationsof performancecharacteristicsassociated
with each group. Performingarts group A may put on many high-quality,
main-homeperformancesper season, while performingartsgroupB presents
fewer, less ambitiousperformancesper season, but does extensive touring
with a greatvarietyof productions.The governmentgrantingdecision maker
must try to best fulfillthe culturalpolicy objectives of his agency, withinthe
fixed fundsavailable.
Arts administratorsof individualgroupsface direct trade-offsituations.In
light of anticipatedand realized support from governmentalagencies and
anticipatedrevenue from box-office and other earnings,they must develop
and implementgrouppolicy on combinationsof performanceobjectives.
The implicationof the trade-offproblemis that greaterefforts in a given
directionordinarilyimplygreaterrestraintin pursuingotherobjectives. For-
mulationof intelligentpolicies in the performingarts world requires some
knowledge of qualitativeand quantitativerelationshipsbetween operating
costs and variouscharacteristicsof live artsperformances.The remainderof
this paperdescribesan empiricalstudyof cost relationshipsin the performing
arts and considerspolicy implicationsarisingfromthe results.

EMPIRICAL STUDY

Data on costs, output and output-relatedvariables were examined for 6o

professionaland semi-professionalperformingarts companies operatingin
Canada in I971-I972.1 Thirty-threeof these companies were symphony
orchestras;twenty-threeweretheatrecompaniesandfourwere operagroups.
Since boththe natureof performancesas well as the productionfunctions,i.e.,
capitalcosts relativeto labourcosts, are similaracross largetheatreandopera
groups, the four opera groups were combined with theatre companies to
increasethe numberof observationsin that category.
The objective of the study was to examine the quantitativeimpact of
various factors on the cost of supplyinglive artistic performances.It was
hypothesizedthat total costs of providinglive artisticperformancesdepend
primarilyupon the following majorfactors: quantityof basic service units;
output mix; service quality, and company attitudes regardingperformance
varietyand cost-controlprocedures.
For our sampleof symphonyorchestras,the quantityof basic service units
offered by each orchestra was measuredas the numberof individuallive
performancesgiven duringthe 1971-72performingseason. Differencesin the
nature of the performancesoffered by various orchestras, i.e. output mix,
were accountedfor by two variables:the ratioof mainperformancesto total
performancesand the percentageof mainperformancesgiven on tour. It is to
be expected thatthe totalcosts of a given numberof live performanceswill be
8 A list of companiesexaminedis includedin the appendix.

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 Policies in the performingarts / 37

higher, the greater the number of full orchestra performances(i.e. main

performances)in this total. The percentage of tour performanceswas in-
cluded as a measure of output mix to control for any impact that different
location sites would have on the costs of performances.Average attendance
per tour performancewas taken as a proxy for the perceived quality of the
group.Qualitydistinctionswill, in part,exist due to differencesin pay ratesof
artists and variations in the scope and size of supportingactivities. The
presumption is that different input requirementsper performancewill be
transformedinto expressions of audiencepreferences.A symphonygroup's
preferencefor presentingvariedperformanceswas measuredby the lengthof
its performingseason. Differences in length of performingseason are pre-
sumed to reflect differences in necessary rehearsal and setting-up times
associated with presentingvaried concert programmes.Finally, differences
in orchestraattitudestowards cost-controlwere measuredby the age of the
organization.It was hypothesizedthat older symphonieshave less difficulty
injustifyingexpendituresin theirgrantapplicationsthan do youngergroups,
and that this phenomenonencouragesolder groupsto spend proportionately
more on 'non-productive'activities giving rise to higher costs for a given
numberof performances.
Due to data and conceptual differences, a slightly different cost-output
relationshipwas specified for theatre/operagroups. The variableto be ex-
plainedwas, as for symphonies,total annualoperatingcosts for the 1971-72
performingseason. The performancemeasureused was the numberof main
performancesoffered duringthe year. Instead of using a proxy measurefor
performancediversity, data were availableto calculatethe averagelengthof
run of performancesofferedby each group. The other explanatoryvariables
were the same as for symphonygroups.
The statistical relationshipsbetween operatingcosts and the various ex-
planatoryvariableswere estimatedusing ordinaryleast-squaresregression.
Separate equations were estimated over the cross-section of symphony
groups and theatre/operagroups. Various specificationsof the cost-output
relationship,both linearand non-linear,were estimated.The non-linearrela-
tionshipswere foundto providethe best statisticalresults.9
The most significant conclusion to emerge from the study concerns
economies of scale. Ourresultsindicatethatfor our sampleof performingarts
companies, economies of scale do exist: as the numberof performancesper
year increasesup to 2Io maintheatre/operaperformancesand i 15 symphony
performances,average costs per performancedecline. In our 6o company
sample, only eight performinggroups were offering more than the cost-
minimizingnumberof performancesper year. In otherwords, all but eight of
Canada's theatre groups, operas and orchestras could achieve cost savings
per performance if they expanded their annual number of performances.
Our results also shed some light on a number of other dimensions of the

9 The coefficientof determinationforthe symphonygroupcost functionwas .730whenthe average

cost functionwas specifiedas beingU-shaped.A similarspecificationof the cost-outputrelation-
shipfor theatre/operagroupsresultedin a coefficientof determinationfor the overallequationof
.871.

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38 / Steven Globermanand Sam H. Book

cost-outputrelationshipfor performingarts companies. One deals with dif-

ferences between costs of home versus tour performances.No statistically
significantdifferencein reportedcost relationshipsbetween tour and home
performanceswas evident. Tour performancesare generally sponsored by
some communityorganizationthat rents a hall, advertises the performance,
sells tickets, etc. and pays the performingcompany a flat fee. The costs
absorbedby the sponsoringagency are not reportedby the artscompany,and
one mightexpect averagereportedcosts per tourperformanceto be less than
costs per home performance.However, additionalcosts for travel and ac-
commodationsare incurredby the companywhen it is on tour. Our analysis
indicatesthat the increasedtravel costs just about balance out the reduced
costs of rental,advertising,etc., for home and tour performancesof similar
type andqualitylevels.
There is reasonably strong evidence indicating that older, though not
necessarilylarger,performingartscompanieshave highercosts for any given
numberand type of performances.This result might be explained by the
argumentthatolder, betterestablishedartscompaniescan be morecertainof
receiving government support since grantingagencies may have a vested
interest in maintainingthe existence of arts groups in which substantial
amountsof money have alreadybeen invested. Consequently,older groups
can be less diligentaboutminimizingcosts. An alternativeexplanationof the
relationshipis the possibilitythat older companieshave higherbuilt-incosts
not capturedby any of our explanatoryvariables.One such source of higher
costs is highersalariesassociatedwith oldergroupmembers.However, when
the size of group was held constant, there was no statistically significant
relationshipbetween the age of an organizationand average salariespaid to
groupmembers.
A finalhypothesistested returnedthe expected results. Otherthingsbeing
equal, shorterlengths of performanceruns, i.e., greaterperformancediver-
sity, lead to highercosts per performance.

POLICY IMPLICATIONS

An importantand controversialset of issues facingdecision-makersin Cana-

dian arts organizationsinvolves decentralizationof artistic activity. There
seems to be widespreadagreementon two propositions:I. artistic activity
should not be concentratedsolely in urbancentres, but shouldbe accessible
to all areasof the country;2. artisticactivity in any one areashouldnot be the
preserveof a smallsocial class, but shouldreachas manypeople as possible.
The firstpropositioncan be called geographicdecentralization;the second is
often referred to as democratization of the arts. The controversial aspects of
decentralization arise from tradeoffs with other policy goals.
Government policy-making in the arts takes its general direction from
elected officials and is specifically shaped through government granting and
advisory agencies (Canada Council, Ontario Arts Council, Quebec Ministry
of Art and Culture, etc.). The main governmental impact is felt through year
to year decision-making on how much grant money is to be allocated and how
funds are to be distributed among the individual groups. The granting deci-

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 Policies in the performingarts / 39

sions of government agencies are incrementalin nature and impact with

varying time lags; however, they are the single most importantvariable
operatingin the arts world. By directingmoregrantmoney to certainartistic
efforts, furtheranceof a given set of policy objectives will be facilitated.
However, given a fixedbudgetfor publicfunding,concomitantdisadvantages
will be imposed upon achieving objectives in other directions. The impor-
tance of a cost study of the type describedis that guidancecan be offered to
grantingagencies in makingallocativedecisions in trade-offsituations.
On the questionof geographicdecentralization,the evidence on economies
of scale, combined with empiricaldeductionson costs of tour versus home
performances,indicate that geographicdecentralizationcan be carriedout
most efficientlyfrom a cost standpoint,by expansion of existing companies'
performingschedules, ratherthanby creatingnew, local companies.10
There are importantnon-economicconsiderationsbearingon the issue of
creating new, local companies as opposed to scheduling more touring by
established companies. Some argue that only throughthe development of
indigenous, community-orientedarts groups can artistic activity thrive in
small communities.On the other hand, it could be arguedthat medium-sized
existing companies can only grow in artistic stature if they are given the
opportunityto expandtheirseason throughtouring.Hence costs enter as one
inputinto the decentralizationstrategyto be chosen.
A final note on geographicdecentralizationconcerns differencesbetween
the two art form sectors regardingeconomies of scale. It was found that
economies of scale are more pronouncedin theatre/operathan in symphony
orchestras.This is not a surprisingresult since a significantpercentageof the
costs of theatregroupsand operacompaniestakes the formof costumes, sets
and propswhich have a 'fixed' cost nature."I
As a policy implication,this result suggests that it is less costly to initiate
indigenousculturalexpansionthroughthe formationof new symphoniesthan
throughformingothertypes of artisticgroups.
Two additional policy considerations stem from the study. One is the
well-knowntrade-offbetween performancediversificationand cost-savings.
As mentionedabove, greaterdiversityin a company'sperformanceschedule
leads to greatertotal costs per any given total numberof performances.Yet
without diverse performingschedules, arts companies will have difficulty
continuingto attract large audiences and developing and retainingtalented
artists. It is clearly importantthat a balance be struck between 'excessive'
diversity,(andcorrespondinghighcosts), and insufficientdiversityleadingto
a downgradingof artisticcapacity.
io The conclusionthat the least costly way of achievingdecentralizationis throughencouraging
existing companiesto expand their touringprogramcannot be pushed too far. As expansion
proceedsto moreoutlyingareas,travelcosts will rise. This mightrequirethe developmentof new
permanentgroupsbasedcloser to the peripheryof the expandingartsfrontier.
II For our sampleof symphonyorchestras,all salariesand fees combinedmadeup 81 per cent of
total expenditures,anotherio per cent of total expenditureswas comprisedof costs for renting
the concerthall,sellingtickets,andlikeactivities.Forour sampleof 23theatregroupsand4 opera
companies,total salariesand fees of all kindsconstituted65 per cent of total costs for the year.
Theatrerentalandoperatingcosts were anotherio per cent. Expenditureson sets andpropsfor
the yearwere approximatelyIo per cent of the totalrecordedcost.

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40 / Steven Globermanand Sam H. Book

The second policy considerationconfronts the grantingagencies them-

selves. Empiricalresults supportthe hypothesis that older, establishedarts
companiestend to have highercosts per performancethannewer companies,
afterabstractingfromqualityandotherperformancedifferences.The empiri-
cal evidence can be interpretedas indicatingthat some slack exists in the
administrativeand productiveprocesses of the older companies,and there is
some roomfor strongercost controlefforts. Grantingagenciesmightconsider
devoting relatively more funds to internalappraisal,auditingand cost ac-
counting procedures directed towards arts groups, in order to minimize
administrativeslack associatedwith oldercompanies.The benefitsof suchan
effort clearly requirethat the costs of implementingauditingcontrols do not
exceed resultantcost savings. Potentialdifficultiesin accommodatingartistic
with accountingperformancecriteriaare also recognized.

CONCLUSION

While severalof the importantpolicy trade-offsdiscussed are well knownby

policy makers,it is enlighteningto obtain empiricalvalidationand quantita-
tive estimatesof the magnitudeof theirimportance.
Cost analysispointsup the urgentneed foradministratorsin the performing
arts sector to clearly define explicit policy objectives. It is only througha
careful balancingof the benefits of differentobjectives and their direct and
indirectcosts that an intelligentnationalartspolicy can be formulated.

APPENDIX
Theatreand OperaCompanies SymphonyOrchestras
CanadianMimeTheatre AtlanticSymphonyOrchestra
CanadianOperaCompany BrantfordSymphonyOrchestra
CitadelTheatre CalgaryPhilharmonicSociety
CharlottetownSummerFestival ChamberPlayersof Toronto
EdmontonOperaCompany Deep RiverSymphonyOrchestra
FactoryTheatreLab East YorkSymphonyOrchestra
GlobeTheatreSociety EasternOntarioConcertOrchestra
Le Theatredu RideauVert EdmontonSymphonySociety
MagnusTheatreNorth West EtobicokePhilharmonicSociety
ManitobaTheatreCentre GeorgianBay CommunityOrchestra
MontrealInternationalTheatre HamiltonPhilharmonic
NationalArts Centre,HexagonCompany HuroniaSymphonyOrchestra
NeptuneTheatre InternationalSymphonyOrchestra
PlayhouseTheatreCompany KingstonSymphonyOrchestra
QuebecOperaCompany Kitchener-WaterlooSymphonyOrchestra
Shaw Festival LondonSymphonyOrchestra
StratfordShakespearianFestival McGillChamberOrchestra
StudioLab NationalArts CentreOrchestra
TarragonTheatre NorthYorkSymphonyOrchestra
Thifitrede Nouveau Monde OakvilleSymphonyOrchestra
du nouvelOntario OrchestreSymphoniquede Montreal
Theiltredu P'titBonheur L'OrchestreSymphoniquede Quebec
The6tre
Theitre Passe Muraille OshawaSymphonyOrchestra
TorontoArts Foundation OttawaCivic Symphony
TorontoWorkshopProductions PeterboroughSymphonyOrchestra
VancouverOperaCompany St. CatharinesSymphonyAssociation
YoungPeoples'Theatre TorontoSymphonyOrchestra

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 Policies in the performingarts / 41

ThunderBay SymphonyOrchestraAssociation WinnipegSymphonyOrchestra

VancouverSymphonySociety WindsorSymphonyOrchestra
VictoriaSymphonySociety YorkRegionalSymphonyOrchestra

REFERENCES

Book, S.H. and S. Globerman (I975) The Audience To The Performing Arts (Toronto:
Ontario Arts Council) forthcoming.
Fisk, George (1963) Leisure Spending-Behavior (University of Pennsylvania Press)
Ford Foundation (1974) Financing The Performing Arts (New York)
Houthakker, H.S. and L.D. Taylor (1970) Consumer Demand in the United States;
Analyses and Projections 2nd ed. (Cambridge: Harvard University Press)
Moore, Thomas G. (I968) The Economics of the American Theater (Durham: Duke
University Press)

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