Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Friday, November 18, 2005

Prices Make Markets

iTunes prices are going to get shaken up, it seems - with "multiple points" for different tracks.

This is a very good thing.

Why? It begins to make the music industry, well, obey the basic laws of economics.

As I argued a long time ago in a galaxy far away, one of the music industry's big problems is that prices transmit no information. This creates further incentives for consumers to buy insurance against the information asymmetry at the heart of the industry - file-sharing.

That is, the price mechanism itself has been a distortion in the music industry (which is amazing if you think about it). So prices will finally begin to reflect demand. Of course, the danger is that this will be used a strategic tool by the industry, just like radio playlists, which got gamed by payola. Let's hope not; they'd be shooting themselves in the foot (with a Plasma Autorifle.

-- umair // 3:00 AM // 7 comments


I'm not sure how price can reflect demand with a non-scarce good. Is the idea that Apple puts the price up for things that are more popular - thus signalling that it's "good" -; and lowers the price for unpopular stuff - 'cos it's "bad"?

Or does the price of the most popular stuff go down, representing the fact that it's so ubiquitous (it's on the radio 10 times a day anyway) that the utility of your extra copy is fairly low. And to compete with all the free copies that are gonna be widely available?

The article suggests the former. But this is pure cynicism. The labels want to put the price up for the fashionable stuff because they figure the kids are so desperate / dumb that they'll pay anyway. But there's no sense this sends any kind of meaningful "signal" about the product.

I really don't see what different prices can 'mean'.
// Blogger Composing // 2:42 AM


The technological marginal cost of digital music is zero, as you're pointing out.

But in fact, there is a very real, relatively elastic supply curve here.

That's because there are many other costs to be factored in: licenses, distribution, and marketing (the biggie). These make the true marginal cost of media goods nontrivial, even if they're digital.

So, in an efficient market, the price of Britney should be greater than the price of, say,
Fischerspooner. This is exactly what the industry is proposing.

Whether or not they're doing it to be evil, this resets media industry economics, because the supply curve starts to reflect true marginal costs.

What this means strategically is that demand for Britney goes down, and demand for Fischerspooner goes up; that is, that value creation is far more closely aligned with value capture.
// Blogger umair // 4:19 AM

Umair. I'll believe you on the technical details of the economics.

But it strikes me that any industry where "Britney is justifiably more expensive than Fischerspooner to reflect the marginally higher cost of the marketing that made her more popular than FS" is so out of touch with reality that flat-rate pricing should be the least of its worries. :-)
// Blogger Composing // 4:32 AM

Hey Phil,

That is exactly the point - this is another nail in the coffin of blockbusters, mega marketing, etc, because *finally*.

Think about it this way (actually I should write a post about this, because it's a good example) the totally absurd situation of the Fischerspooners of the world essentially subsidizing the Britneys ends once prices reflect true marginal costs.

Thanks for the comments,

// Blogger umair // 8:36 AM

Joel Spolsky :
// Blogger Composing // 6:57 PM

IMHO all this will do is incentivize piracy.
// Blogger kid mercury // 10:44 PM

Development costs some money. The replication cost is almost zero so after some level you profit. Why differentiate artists? The unique answer is marketing in my opinion.
// Blogger Emerson // 3:34 PM
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