20 February 2011

Price Discrimination and Music

I’ve finished reading The Price of Everything (review to come later) and it has a rather interesting chapter called “the price of free.”  It touched on the issue of copyright and music, and caused me to think about the some of the problems facing the music industry.

The biggest problem facing the music industry is, in my mind, laws against price discrimination.  Price discrimination, simply put, is when a seller charges different prices to different customers for identical products.

The reason I believe that anti-price-discrimination laws are so problematic is because it doesn’t allow consumers to pay at different prices along the demand curve.  For any artist, there are going to be varying levels of demand.  There are rabid fans, which will be willing shell out $20 for a special edition CD. There are casual fans that pirate a couple of songs, and maybe sing along when the song comes on the radio.  And then there are plenty of fans in between.

The problem is that sellers can’t charge different prices for the same song, and so consumers decide purchases on a binary system.  There are a large number of songs for which I wouldn’t pay more than a nickel each.  And then there are other songs for which I’d be willing to pay three dollars.  The failure, then, is that I song prices are pretty much fixed.  I can’t buy songs at five cents apiece nor am I willing to pay more than that.  If companies were allowed to sell songs at various prices, they could sell more to consumers.

Unfortunately, the government has seen fit to interfere in the market, and so music sellers are not able to properly tap into the market.  Thus, part of the market failure in the music industry is due to government interference.

One possible solution to this problem is to allow consumers to name their price for singles and albums, with a minimum threshold (maybe five or ten cents per single and a dollar per album, for example).  This would better approximate the market value for music, and superfans will still have the ability to show an artist how much they value them.

2 comments:

  1. Radiohead did something similar with their last album "In Rainbows." You had to pay something to download it and I think the minimum was $1 US because of the way the payment system was set up, but you could pay whatever you wanted as long as you hit the minimum that the website could process.

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  2. The book mentioned that album as a case study, and said it did relatively well. Olney Clark has that option for his album, though the minimum is $8. I suspect that bands would find this model more profitable than trying to sell every song for 99 cents. For most bands, i just don't find their music to be worth that price.

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