The music industry can do better

CD sales are down, and the music industry is complaining it is losing out with the online business (the legal one and the illegal file-sharing). It turns out the music industry could do much better with its online business if it just tried a little bit harder.

Benjamin Shiller and Joel Waldfogel show that price discrimination could improve profits by 10% while increasing consumer surplus, a win-win scheme. The idea is very simple. The current uniform pricing at $0.99 leaves surplus on the table for some songs were people would be willing to pay more, while a lower price for some songs would increase sales significantly. In addition, by offering various bundling scheme, it is possible to increase sales and surplus simultaneously.

Specifically, they consider component pricing (prices differentiated by song, but not consumer), pure bundling (one price for a set of songs, in particular larger sets), two-part tariff (a fixed fee plus a per song price) and nonlinear bundling (fixed fee plus a variable price). Shiller and Waldvogel use survey data on song valuation to establish optimal prices for all schemes, and find that in all cases profits and consumer surplus can be improved.

How long will iTunes maintain uniform pricing? The study show that some songs could be sold at a substantially higher price (for example $4.89 for "See You Again" by Miley Cyrus). Amazon seems to be trying such schemes, but with the competition of iTunes, only discounts will work for the moment...