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May 30, 2006

Why Steve Jobs Doesn't Listen

Every couple of months, you get an article demanding that iTunes start following the laws of economics and cease charging the same price for Shakira and The Coup. Occasionally, the record companies get into the act, leaking their unhappiness with a dominant service that doesn't allow them to jack 50 Cent's CD up to $16.99. There's a bit of tensin between the first group and the second, as the first wants to make less-heard artists cheaper so they can move more units while the second wants to make popular albums more expensive so they can reap more profits. Julian Sanchez, I think, critiques the economic logic both correctly in this post:

People are actually going to be a lot less price elastic than you might think, especially for the niche items. That is, suppose Quasi is selling a lot fewer albums than Kanye West. The normal market conclusion would be that Quasi should be priced lower to move more. But that's not necessarily the case, because most consumers aren't actually sitting there making the decision at the margin between Quasi and Kanye. Rather, the people who like Quasi are going to buy it whether it's at 99 cents or 50, and even if it were 10 cents, Quasi just ain't going to be most people's cup of tea. Conversely—and this is more speculative—the items at the top are likely to be stuff for which people have thinner preferences, and are therefore more price elastic. That is, a lot of people are going to download Eminem (or whatever) precisely because it's the hot track everyone else is listening to, but might be dissuaded by an extra 50 cents.

That still leaves record company greed, but I don't think that sort of impulse is particularly vulnerable to critique. You should read the rest of Julian's post though -- it's a surprisingly interesting look at the economics of electronic information.

May 30, 2006 | Permalink

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Comments

Before spinning out too elaborate an explanation based on unknown elasticities, it might be worthwhile to step back and simply notice that " 'market' price" is usually an administered price. The prices of most things we buy, not just music albums or movie tickets, but also toothpaste and shirts and soup and fast food take-out, are administered. The price is more or less fixed as part of an agreement, tacit or explicit, between the manufacturer or publisher and the retailer.

Fixed prices take price "out of the game", leaving the players forced to concentrate on other activities within their control to enhance sales and profitability.

This isn't an argument for or against having multiple tiers of music pricing, but it is a suggestion that context is important. It is not just about consumer response, but also about the conflicting interests of various players in the distribution chain; adminstered prices represent a kind of truce in those conflicts, and, as is clearly on display in this case, renegotiating is not easy. The retailer may want popular music at low prices to attract traffic, which will help the retailer to profit from other sales, while the publisher may want popular music at high prices to reap profits/rents on a large sunk cost investment in promotion and on the artist's talent.

In short, administered prices are the rule in the consumer's world, and this is a consequence of organizational pressures in the distribution chain, and has little to do with the consumer's demand elasticity for any given product.

Posted by: Bruce Wilder | May 30, 2006 2:09:05 PM

"Joel on Software" wrote an interesting bit about iTunes pricing last year:

http://www.joelonsoftware.com/items/2005/11/18.html

Posted by: Colin | May 30, 2006 2:45:00 PM

That was an interesting article, thanks for the link. However, I'm commenting to thank you for your shoutout (well, mention really) of The Coup.

Posted by: Eric | May 30, 2006 2:52:47 PM

It's hard to disagree with Sanchez's logic here - we're talking about products where ceteris paribus the deciding factor is entirely subjective taste. And it's undeniable that some things appeal only to a small number of people, while others appeal to large numbers. What would be interesting to do (or to see, anyway) would be a more precise model/statistical analysis of how price elasticity changes across the musical (or other aesthetic) spectrum.

On the other hand, I'm not sure this is right:

f I've got a hundred (physical) widgets in stock, I'm going to be able to sell exactly a hundred of them. (Of course, if they're popular, I may order more, though I as the retailer also have to pay for another batch.) So I'm primarily interested in the hundred consumers who'll pay the most for it. The finite number of widgets get allocated to the people who place the highest value on them, and I maximize my profits. But the marginal cost of a downloaded song is zero: There's actually no allocation problem, because I can download the same song you just did. The supply, once the song is created, is effectively infinite. That means it's going to be especially profitable to sell more units at a lower price.

Bandwidth surely increases the marginal cost. It may not be sufficient to outweigh the more units/lower price logic, but you can't ignore it.

Posted by: Ginger Yellow | May 30, 2006 2:55:53 PM

Music sales are built on a certain intangible quality of desirability that has nothing to do with what it actually costs to produce the product. Thus, it's the "top" acts that have the most to do with driving up prices, as people have shown a willingness to pay a premium for a favorite act (this is played out more extravagently in the live concert market). This is not new, and record companies have considerable experience (and expertise) in where the floor and the ceiling are for this. Ultimately, I suspect even iTunes will see the light if they haven't yet (though I love their egalitarian approach). I'd pay extra for Eminem, and I'd buy a cheaper priced new artist if I'd only heard, say, one song all the way through. But then, I have years of training as a consumer (ask my record - yes, album - collection) and a love of pop music. Your own tastes may differ.

Posted by: weboy | May 30, 2006 4:24:37 PM

For the life of me, I can't understand why Steve Jobs is always blamed for the pricing at the iTunes Music Store.

Do you see any competition among the record labels? Can you report any cheaper alternatives?

By all accounts, the RIAA cartel (not too long ago found in violation of price-fixing/collusion laws) wants prices higher, never lower. They negotiate with Apple on the license fees and have been quite vocal about wanting to raise them on high-demand titles. To it's credit, Apple seems to have found a way to keep the price unchanged for what, three years now?

Of course, you don't have to buy from iTMS: feel free to buy the CDs and rip them yourself.

Posted by: paul | May 30, 2006 5:04:32 PM

So there's apparently economic benefits of Insufferable Music Snobbery. If you avoid imports, at least.

Posted by: Amanda Marcotte | May 30, 2006 8:47:22 PM

Hey Ezra,

Here's my take on the subject:

http://www.techliberation.com/archives/039233.php

Posted by: Tim Lee | May 30, 2006 9:38:35 PM

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