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Does iTunes violate Supply/Demand?

I recently heard that iTunes was planning to raise the price of some popular songs from $0.99 to $1.29, and at the same time, some less popular songs would be reduced to $0.69. Makes sense to me. But from techdirt, “Oddly, the LA Times article claims that the new pricing scheme is “true to supply-and-demand economics,” but, as Gizmodo notes, that’s not true at all. The supply is infinite. So if it were true to supply-and-demand economics, the price would be free. The actual price is based on an artificially limited supply and a made up demand.” Huh? Let’s look at a supply demand graph;

Supply only goes up if the price is maintained, at a price of zero, the supply drops to zero as well (in theory). The Gizmodo quote confuses the medium (the bit going across the internet) with the product itself (the song). The supply of good music is certainly not infinite, you’d not listen to any and every bank or piece of music that came along. Just as their are bands whose concert tickets are scalped for many hundreds of dollars, their are also bands who don’t sell out their concerts. There is nothing that’s infinite, even clean water is not plentiful everywhere on earth.

I’ve heard of soda machines which contain temperature sensors. These machines are programmed to bump the price based on the temperature, rate of sales, and level the machine is full. iTunes seems to be the perfect venue for little known bands to offer their songs for a lesser amount, even free for a time, and for superbands to get a bit more money. But lets not kid ourselves, supply/demand is far from dead.

Joe

  • Mike Masnick April 2, 2009, 2:50 am

    The supply curve is wrong in your chart. With a non-rivalrous good that has a marignal cost of zero, the supply curve is flat, and it’s flat at zero. The original statement is correct. If song pricing were based on real supply and demand, it would be priced at zero (another way of noting this is recognizing that P = MC agrees with this). Supply/Demand Curves and P/MC are two ways of looking at the same thing — and both say the price of music, in a competitive market — will be zero.

    The issue is that we artificially limit supply through things like copyright.

    The fact that “the supply of good music is not infinite” is something entirely different. We’re talking about the physical supply of a single song — which, when digital, and a marginal cost of zero, is, in fact, approaching infinite.

    Looking at the overall market for songs is a different issue. We’re talking about the supply of a single song.

  • JOE April 2, 2009, 1:12 pm

    I understand that the supply/demand lines in my post are over simplified. On the other hand, it’s not a line intersecting zero. That would suggest that the very first unit has a cost of zero. I don’t know exactly what a band (A popular, well known band) expect to make on a song (or album), but say it’s $1M, for sake of argument. This at least implies the line cannot start at zero, even though, in theory, a band may agree that once so many songs are sold for a price, they are willing to let it go public, i.e. free.
    There’s still a demand curve, I might agree to pay $2 or $3 for the songs of my favorite band, but I’d not ever need to buy more than one of a given title, and I’d not buy bad songs even at 1 cent.
    So, of course the lines are not lines, they are curves whose shapes cannot really be determined. And for the fact that Apple chooses a price, market forces don’t act quickly as with the price of oil. If they see a real drop in sales due to the $1.29 price, you’ll see that price go away. That’s where the S/D concept comes into play. By the way, I acknowledge the incremental cost of production is essentially zero, same as software downloads. Again, I appreciate your remarks.

  • twh February 2, 2011, 7:17 am

    Is the supply infinite? Or is it always exactly equal to the demand? Or is there a difference?

  • JOE February 2, 2011, 4:47 pm

    Supply and demand cross where the price dictates they are equal.

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