Thursday, April 27, 2006

The price remains the same

Tyler Cowen today asks: why are all iTunes songs the same price? This is a good question because it is clearly the case that some songs are more popular than others and indeed have differential quality (see this CNN story today). All indications are that the real reason is as basic as: Apple wants simplicity so it can sell more iPods even if the music companies would like to be able to say more about pricing levels.

Of course, we should remember that while Apple practices this policy within countries, it does not between them (so much so that you could construct a currency index based on the differentials). But this is more support for the simplicity story than against it.

But when it comes down to it, if a one price fits all model is profit maximising, it implies that, from Apple's perspective at least, the price elasticity of demand for each song is the same at current demand levels. [Of course, I am assuming here that Apple is paying the same royalty per song for each song]. And Apple from time to time have free song downloads so maybe they have assessed that this is not too far off. One day, my empirical colleagues might be able to sort that out.

3 comments:

D.Prentice said...

Hi Joshua,

It is worth noting that perhaps the reason for single prices is that they currently do not have the computing capacity/(methodology?) to determine individual prices for songs (in an automated way). When music was sold primarily through shops, there was usually (and still is) just a small number of prices. My guess is that once they work out how to do it there will be individual prices (or least greater variation in prices for songs)

Kim said...

Well, it is also worth noting that the record companies have been pushing for variable pricing for some time. Back in November 2005, there were news reports that variable pricing was a certainty to come in. In early April this year, the reports were that the issue was a major split between apple and the record companies (with negotiations on now for renewal of licenses). Just this week, the reports were that the record companies might back down on variable pricing. It's a serious point of contention.

SR said...

With variable pricing, there is an information asymmetry in that, when a consumer hears a song on the radio (that they like), they do not know the price, and there is a cost in finding the price. The consumer knows that since the song is on the radio, it is likely to be expensive as well.
A single price removes that information barrier, and may be indeed profit maximising.