Tuesday, November 22, 2005


thanksgiving just around the corner, we went shopping for the necessary baking supplies. thursday we'll head down to john's place for the traditional holiday activites: eat, drink, watch people knock each other over on a huge television.

i'm busy trying to figure out why some people are famous and get lots of press even though they are 99% wrong. and no, i'm not talking about the obvious political examples. i mean this guy (look, i'm giving him more attention), who gets his little essay posted all over the internet, and he doesn't have the faintest idea what he's talking about.

his piece is called "price as signal" (ooo - he sounds so smart and authoritative) in which he claims that big record companies want digital music purchase to be variably priced (that is, not just a constant $0.99, as they are now on itunes, the only online music store that matters) so that they have another bargaining chip to use against the artists that work for them. and that more expensive songs will be more popular because people think more expensive means higher quality. he's got it all backwards, the nitwit.

the truth is, without intervention, in a pure perfect market, the price of a particular song would be almost entirely determined by the demand for that song (our friend is claiming that the demand is determined by the price). marginal supply costs are basically constant - there is some fixed cost in setting up the system and recording the music and promoting the music, but each extra track sold carries the same cost to deliver it. the result would be that the newest hit songs would have a very high price (because there is so much demand) and unwanted songs would be very cheap. this is what the record companies want, because they will increase profits by charging a higher price to those people who are willing to pay it.

but since marginal cost is approximately zero (it costs almost nothing to deliver an extra download), any increase in demand - even a big one, like for a newly released song - would not likely result in a (much) higher price in our idealized market view. apple computer, which runs the itunes store, sees this as a good thing: they can achieve market efficiency and keep things simple all at the same time.

in other words, the record companies don't want variable pricing because they want to exercise their market power over the artists (as in a monopsony) but because they want to exercise their market power over the music consumers, as in a monopoly (or in this case, an oligopoly, but it doesn't matter for this discussion). you see, the itunes store has thus far forced them to adopt a competitive price structure, which is better for consumers, but not for companies accustomed to not having to compete against anyone.

the point is, his whole price-as-signal thing is stupid. it's only about 1% right, but i'm being generous. there, sorry this was so long.

changing the subject, i've suddenly become interested in what this thing is that we call the "scientific method". i'm not sure exactly what it is, yet supposedly i've been doing it for some time now. i'll report my findings in short order.


Anonymous JC said...

Sounds like this came from someone trained in economics.

10:58 AM  

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