The LA Times has an article which questions Apple’s decision to give labels the ability to set a price that is higher than $.99 per song on iTunes(popular songs would be $1.29). They quote a few music outliers who seem to think customers are going to be enraged by having to pay $.29 more per song.
In a world of $4 lattes it all seems kind of silly.
But it provided a starting point for bringing up this old argument…
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.
So the theory is when you have an infinite supply of something the price of that something falls to $0 and they claim there's no cost to digital music which means there is an infinite supply which means it should cost nothing. This is based on the real economic theory that postulates the price of goods tends to go down when the cost to produce those goods goes down.
Now I've discussed this before but it’s been a while and I’ve never really gone after this theory directly so I thought I’d make a post. I have to apologize in advance though because, honestly, a lot of this is going to be kind of ridiculous.
I admit it. I don’t know how to avoid it. The whole thing is backwards. They claim market theory dictates how the market must act when in reality market theory simply tries to document how the market will act.
So even if the theory they are using was correct, which it isn’t, it still would not guarantee how the market will act.
That said, there is one silliness I won’t spend time on and that’s how infinity is a special case in math. Yes, if they were truly dealing with the ability to make an infinite number of copies that would require a discussion on infinity in math. But they aren’t. Truth is they’re just wrong when they say “infinite number of copies”. You can’t make an infinite number of copies. You can certainly make a large amount but eventually all the hard drives in all the world will fill up. The space is not infinite.
So in a mathematical sense they aren’t dealing with “infinity”.
That said, let’s look at two points.
First, for this theory to work you have to completely disregard any money spent in the creation of the music. They are claiming this abstract equation only applies to the cost in reproducing each song but that’s not reality. In reality the money spent up front is passed down through each copy of a song. No matter how many copies of a song you make it still inherits a percentage of the initial creation cost (no matter how tiny a percentage that is).
Second no matter how small a cost it is there is a cost to making each copy of a file. In processor time, bandwidth, storage space, etc… In fact, a whole industry (Cloud Computing) has sprung up to charge for this particular resource. So even if we take the other flawed points on faith we still end up with a theory that doesn’t make sense.
Now again, the numbers here are small and truthfully music probably should be cheaper than it is. But the cost is there and that fact makes their theory completely flawed.
Beyond that there is no mathematical theory that even claims to define what markup a business uses. Drug companies can make a bottle of pills for a dime and then go on to sell it for $80. You see this everywhere. So really the low cost of each digital copy has virtually no bearing.
The only economic theory that applies here is that competition tends to drive down prices when the cost behind those prices is low. But the music industry doesn’t suffer from that because artists are signed exclusively which eliminates competition
(and again that is something that should be dealt with but it’s also a topic for another time)
So when you lay out the facts you realize this “economic theory” is simply a very weak justification for file sharing.