|The World According to Nick|
|My take on Software, Technology, Politics, and anything else I feel like talking about.|
Friday, April 21, 2006
After reading Elliot's post on iTunes:
I was suddently reminded of this scene from Ferris Bueller's Day Off:
Now then, the Laffer Curve actually refers to the point at which Government "maximizes revenue" through taxation (ugh), but there is a similar theory when it comes to price points for a product in a free market.
In this instance, a song on iTunes has a fixed cost. No matter how many units of the song are sold, it cost the same amount to make and market the song. Each song sold creates only a minimum cost for bandwidth to move it across the wire, which for all intents and purposes can be removed from the discussion. Just because there is an "infinite supply" of the song, doesn't mean the price should automatically be negligible. In reality, the company selling the song has to recoup the cost of creating it, and marketing it. Anything they make after that is simply grave. The goal for them is then to charge as much as they can, as long as people are willing to pay it. They can charge what the market is willing to bear.
In fact, even if the number of buyers decreases as the price goes up (which logically it would), the company can still increase the cost, as long as the cost increase offsets the loss in profits because of fewer buyers. There is a theoretical point then where you can maximize the profit.
For instance, if you can get 100 people to but a song for $0.99, you'll make $99. But if 90 people are willing to buy a song for $1.25, you've now made $112.50! Why wouldn't a company want to charge $1.25 then? In fact, if they increase the cost to $1.50 per song, and only 75 people buy it, they still make $112.50. But if they jack up the price to $1.50 and only 50 people buy the song, now they've only made $75. The idea then is for the company to find the point where they can maximize profit. That's what sets the price, not supply and demand.
Supply and demand is certainly an important economic concept to understand, but it isn't what drives all decisions.
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Home: Wauwatosa, WI, United States
I'm a Software Consultant in the Milwaukee area. Among various geeky pursuits, I'm also an amateur triathlete, and enjoy rock climbing. I also like to think I'm a political pundit.
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