Sebastian Pokutta's Blog

Mathematics and related topics

Music price discrimination at iTunes, Amazon, etc.

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Due to pressure from major music labels, iTunes, Amazon, Wal Mart and others recently announced to introduce variable pricing of music rather than one price for all (e.g. $0.99 in the iTunes store).

The core disagreement is that labels feel that flat rate pricing doesn’t capture enough margin for those hot tracks where users would pay more.

The new pricing scheme in the iTunes store offers songs varying from $1.29 for “hot tracks” to $0.69 for old songs. Given that this is an increase in price of roughly 30% for those hot tracks for which the music labels feel that they could extract higher margins one might wonder if this is indeed so. The bottom line is how elastic or inelastic the demand for music is or putting it differently: are you willing to pay $1.29 for Britney? The objective is to maximize unit_sales * unit_price. But it is not only about price elasticity. Also a psychological effect could play a role here: $0.99 is “just” cents whereas $1.29 looks differently. Thus one might wonder if the music industry, after having just discovered a sustainable new distribution channel, is killing the goose that lays the golden eggs. And indeed, a recently conducted, preliminary short term study from billboard suggests that the ranking (a proxy for sales) for those songs with increased prices might decrease and thus eat into the additional 30% margin or even wipe it out. We should not jump to conclusions though: As the used data basis was rather small, the findings will have to be reconfirmed as soon as more reliable, long-term data is available. In any case, the quarterly results could reveal some surprises this time.

Written by Sebastian

April 14, 2009 at 11:45 pm

One Response

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  1. Are you sure this is called price discrimination? or simply price differentiation

    david

    November 8, 2010 at 11:16 pm


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