Brand New Economic Idea

Perhaps this has been thought through before. If so, I'd like to hear about it. I just read this article, and I'm a little flustered that I don't have a clear idea of what the interesting implications of this are. Anyway, here goes.

On the front page of the January 12 Wall Street Journal is an article entitled "Tale of the Tape: Audiophiles Bemoan The End of the Reel As Quantegy Shuts Plant, Purists Snap Up Supply; NASA Feels the Crunch". In short, there is only one remaining producer of studio quality reel-to-reel tape (which is still preferred by some artists). However, that producer shut down for unrelated reasons on December 31. So ... there's a shortage ... prices are way up ... the sky is falling ... the typical response of non-economists to this sort of thing.

But the kicker is at the end. Jeff Tweedy of Wilco notes that:

 

The band has an archive of around 100 reels of tape it has used in recording its various albums. By splicing out and saving the final version of each song, he figures they can maintain the archive and also generate a supply of tapes that can be recycled for future recording sessions. Still, Mr. Tweedy jokes, if the tape scarcity continues, even some of the archived recordings might become expendable. "I'm just fearful that all the master tapes at the loft would be worth more if they were blank," he says.

Here's the economics I don't understand. You buy a blank tape at time t at something close to marginal cost. At time t+1 you transform that tape into a more valuable product - your band's master (but that may not be unique or perfect, so pricing it will be like pricing a limited edition artwork in which some pieces have more value than others, and further your pricing of it may not be the same as others' pricing of it). At time t+2 the price of blank tape identical to what you bought at time t rises. So, your response at t+3 is (hypothetically) is to destroy the master you made at t+1 to make a new one of uncertain quality.

What is the optimal behavior here? I'm not sure I have a clue just yet (but I'm thinking).

Here's one idea that I did think of that is probably superior to the story I just outlined. Sell your old masters but accept only blank tapes of appropriate quality as payment. You get what you need, your audience will probably be thrilled to get their hands on an outtake, and more than likely the sort of fan that would enter into this agreement wouldn't destroy the original.