If you mosey on over to Selena’s Instagram page, you’ll see that she is sporting a ton of Puma gear. According to E! News, she signed a two year deal worth over $30 million. Kim Kardashian is another all-star advertiser earning $500,000 per post. Cristiano Ronaldo carries a whopping 104 million followers and also cashes in at around $400,000 per sponsored post.
Since no one seems to want to sponsor me on Instagram, I’ll settle for explaining the economics of this craziness.
This isn’t easily explained with a simple supply and demand graph. For this complicated stuff, we need to reach into Nobel Prize winner Jean Tirole’s toolkit. In 2014, Tirole won the Nobel Prize in Economics for being a badass economist who had (well, still has) the uncanny ability to model out complicated market structures. With these economic (not Instagram) models, he highlighted how markets have a lot of moving parts and cautioned against “one-size-fits-all” regulations.
Tirole’s warning is particularly important for two-sided markets, like the Instagram insanity mentioned above. The market does not simply consist of the clothing line and consumers, but of celebrities who promote the clothing line as well. There is a market between Puma and Selena as well as a market between Puma and consumers. Both are separate even though it involves the same product.
If we think about it, most “market transactions” involve two-sided markets. Credit cards, like Visa, MasterCard, and Amex, have a market with merchants and another market with cardholders. Newspapers have readers in one market and advertisers in another. Facebook and other social media platforms cater to users and advertisers. Browsers like Chrome, Firefox, and Microsoft Edge have users on one side and Web servers on the other. The list goes on and on.
The interesting aspect of two-sided markets is that one side is considered the “subsidized” or “loss leader” and the other side is profit-making. Together, these two-sided markets end up being quite profitable for the company as it expands the business. Importantly, if done right, companies use the two-sides to safeguard against losses. It’s kind of brilliant.
Selena Gomez is undoubtedly the “loss leader” of the two-sided Puma market. No matter how wealthy she is, there is no way she is spending more than the $30 million on Puma gear in two years. But, the fact that she brings all the boys to the yard, (wait, that’s Kelis…) makes this transaction worth it. The profit-making side is the consumers that want to mimic Selena’s taste in clothes. Which, sadly, is a whole bunch. These people essentially subsidize Selena’s wardrobe AND her fat paycheck!
There is a lot of variation within the clothing line two-sided markets as well. Selena Gomez is not the same as say, Kevin Gomez. Selena has the obvious upper hand when it comes to market power. So, regulating a market like that is not only subject to the other side–the consumers–but the dynamics of advertising market as well.
Considering Tirole’s caution of how to go about regulating these two-sided markets, Instagram superstars now have to disclose that they are, indeed, being paid to sport the gear. This type of regulation is light-handed, yet promotes consumer welfare by providing transparency. Tirole’s concern with many two-sided markets is that information of one side is hidden to the other. His approach would be to study each market on a case-by-case basis and offer the best way of increasing transparency. With the countless number of two-sided markets, it seems like Tirole and Co. have enough work to last them several lifetimes.
But, I bet they won’t make as much cheddar as Selena.