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Listener Comment: Jon the Economist

October 8th, 2008

Remember when I asked for comments from economists on what will happen with consumer electronics in the future given that the economy gets worse? Well, Jon had this to say:

OK… so you’ve got at least one economist listener. Now let me start by saying that I’d normally charge $50,000 to answer this question. But for $50,000, I’d actually look at, you know, data and stuff rather than pulling an answer out of my ass. But that’s what you get for free. (That’s an economist for you.)

First, assume a recession. I think that’s a pretty safe assumption for now, but note that a recession requires two straight quarters of economic drops, and we haven’t even had one yet. But everyone expects the first negative numbers to come in soon.

So, in a recession, people’s incomes fall. Now two things happen when people’s income fall. People cut back on consumption, deferring big purchases, for example. Second, people shift within categories, replacing steak with hamburger and trips to Europe with trips to Coney Island. Trips to Coney Island and hamburger in this example are what are called inferior goods, in which consumption rises as income falls. Steak and trips to Europe are called normal goods.

So in the AV sphere, what’s an inferior good and what’s a normal good? In general, new technologies like Blu-Ray which require an outlay without a huge change in the experience are clearly normal. So are the top-end gear in general.

For a lot of families, people with cable and a premium service or two and Netflix and DVD purchases, what will probably happen is a pure cutback — people will give up something. I’d guess it would go something like drop DVD purchases (too easy to substitute PPV) then drop HBO and drop Netflix last, because the marginal cost of movies is cheapest there.

The best case for AV as an inferior good is if staying home replaces going out. A 5.1 HT is very, very cheap when amortized over the replacement of say, 10 nights listening to live music at a club.

So, instead of spending $50,000 and getting the answer, you get a framework in which you can come up with the answer yourself.

Thanks, Jon, for your insightful and affordable response.

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  1. October 8th, 2008 at 09:51 | #1

    Great feedback. It’s sensible and coincides with what I figured would be the case. Home AV can, in a recession, be looked at by many as a way to save on expenses if you normally have a more active lifestyle that involves dinners out, movies, etc.

    As you mentioned, however, this will end up leaning towards the low-end and entry-level markets, leaving the new Blu-ray format and mid-fi and higher-end equipment trailing in sales.

    If the bottom truly drops out, Hulu (or Netflix) will beat a new Blu-ray player (and software sales) every time.

  2. BobMac
    October 8th, 2008 at 19:16 | #2

    The economy may be in a recession (at least unofficially,) but as long as I have a job, then I’m not in a recession. I still plan on buying a new plasma, blu-ray player, and receiver this year.

  3. October 9th, 2008 at 09:09 | #3

    You go Bob!

  4. Justin
    October 9th, 2008 at 09:37 | #4

    Bob, a recession is when your neighbor’s out of work. A depression is when you’re out of work!

    –Harry S. Truman

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