Tuesday, October 09, 2007

O.K. Consumer: Pick Your Price



I love Radiohead. Really, love. I still remember sitting in my car in the record store parking lot with one of my best friends, listening to their fourth record, Kid A, all the way through—in awe. That record took Radiohead, and rock music in general, in an unexpected direction. And true to form, Radiohead is again doing things a little differently with their latest effort, In Rainbows, releasing October 10. But this time, the surprise isn't the music itself—it's how they plan to deliver that music to the world.

Recently freed from their ties with the record label EMI, Radiohead has decided to release their latest album in two ways: as a disc-box containing the CD, vinyl, and various Radiohead goodies—available for ₤40 (about $81)—or as a download. The interesting aspect of the download option is that you can pick your own price. $0? Fine. $80? Fine. You pay whatever you want.

To find out more, check out Shane Richmond's recent column, "How Radiohead killed the record labels," and this NPR interview with Tyler Cowen of George Mason University.

Discussion Questions

1. Why would Radiohead put itself out there like this? If past releases are any indication, there are certainly millions of consumers willing to pay normal price for a new Radiohead album. But will they pay, given the choice? Like me, some fans will pay willingly, deriving some degree of benefit from knowing that they're compensating a great band for its creative efforts. You know that feeling you get after you've given a good tip? That good feeling usually comes from visible tipping—that is, the recipient knows who you are. Paying for the download, by contrast, is anonymous. How might this affect what people actually pay?

2. I certainly wouldn’t be blogging about this album if it were $9.99 on iTunes. Even as non-fans read about this, they may be curious enough to check out the Radiohead site. They may even listen to a song or two. Maybe they'll like it enough to cough up some money for the download, or maybe they'll buy the disc-box, or a concert ticket, or a T-shirt. What is Radiohead’s marginal cost of offering one more digital download for sale; what is the marginal benefit to the band of having additional listeners? Might a broader fan base generate enough revenue to more than make up for the revenue the band forgoes by not selling downloads at a standardized price?

3. A firm engages in perfect price discrimination when it charges each consumer a price equal to his or her individual willingness to pay. How is this effort similar to price discrimination? How is it different?

4. How much will you pay? You would maximize your consumer surplus by paying nothing. But can you stomach it? Does a self-selected price of $0 bring along with it an intolerably high price in guilt? Along these lines, how will the prices paid by the dedicated fan differ from those paid by the casual observer?

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2 Comments:

  • At 2:12 PM, October 10, 2007, Blogger Cashew said…

    Radiohead already has a lot of money. They are somewhat fed up with record labels. They make most of their money touring. They really like their fans. This honestly isn't as baffling a question as most econ bloggers are making it out to be. I think that Radiohead cannot really be viewed in the framework of homo economicus.

     
  • At 8:54 AM, October 12, 2007, Blogger R. Winsome said…

    Radiohead is not the first or only band to do this. They're just the biggest. Small bands do it as well and none of them are going to get as big as the few superstars that the record industry creates, but a much higher number of them will be modestly successful than the traditional model, which is what they really want.

    On your questions: Radiohead isn't risking all that much here, by cutting out the middle-man they're getting a much higher percentage of what will surely be a lower take. The only people who are really losing is the recording industry, and as far as i'm concerned that's a very good thing.

     

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