Who's Daffy Duck?
My favorite piñata for demonstrating the principal-agent problem is Microsoft marketing. But Time Warner also offers good examples in which long-run earnings are sacrificed to serve short-run interests of individual ladder-climbers.
Last year, my kids received the entire Looney Toons collection from a generous uncle. This vast DVD set includes nearly every Warner Brothers animated short from the 1930s to 1960s. The kids absolutely loved it, because — and I didn’t yet realize the significance of this — they had never seen Bugs Bunny or Daffy Duck before.
My daughter, then 7, invited a friend over to see. ”Let’s watch Daffy Duck,” she said. ”Who?” replied her friend. It was hard to get her interested, because, I finally realized, no one under 8 in this area has ever seen Bugs or Daffy before. They are not broadcast here.
You can see how such a situation might arise. The DVD collection is one-of-a-kind, exhaustive, and very expensive. The people who buy such things are over 30 and not price sensitive. So in the short run, if you make the cartoons unavailable on TV, enthusiasts are more likely to buy the DVD. Sales go up. For now.
But the TV shows drive DVD demand 20 years on. In a couple of decades, DVD sales (more likely their digitally delivered equivalent) will collapse, as the first crop of parents arises who have never heard of Bugs and Daffy.
By then, the marketing strategist who came up with this bright idea will be long gone, perhaps even promoted for his ability to increase short-term contribution. That guy is not necessarily evil — he may simply have responded to bad incentives. Designing those incentives is the hardest problem in management.