In part 2 of my series “Sympathy for the labels” (see also part 1) I discussed the concern of labels that selling through eMusic lowers overall profitability by diverting sales away from the iTunes Store and other higher-priced outlets. Note that I’m referring here to labels that are realizing at least some profit from eMusic sales. As I wrote in part 2, labels that are losing money on every track sold through eMusic, e.g., due to fixed per-track mechanical royalties, should not be selling through eMusic, period. However even if a label’s eMusic-related sales are profitable, the label might still have a legitimate concern about whether those sales are supplementing sales through other services, or displacing them.
I think the most straightforward strategy for labels to address this concern is to work with eMusic to implement some form of price discrimination:
A seller price discriminates when it charges different prices to different buyers. The ideal form of price discrimination, from the seller’s point of view, is to charge each buyer the maximum that the buyer is willing to pay.
The basic idea is that selling at a single price divides potential customers into three groups:
* those who think the price is too high (and who therefore don’t buy at all)
* those who are willing to pay the price (but not much more)
* those who would be happy to pay a higher price (but end up paying the same price as everyone else)
In a single price scenario the seller (a record label in this case) makes no money at all on the first group, and makes less money on the third group than could be made in theory. The seller could increase overall revenues and profits by offering a lower (but still profitable) price to the first group, and a higher price to the third group.
However doing this is not trivial:
Every seller would price discriminate if there were not two major obstacles standing in the way. First, the seller must be able to distinguish between those buyers who are willing to pay a high price from those who are not. Second, there must be substantial difficulty for a low-price buyer to resell to those willing to buy at a high price.
Related Posts
- EMusic ends unlimited service
- Feds Rob the Record Labels Blind
- eMusic intros UK MP3 download service
- Cohen Lobbies Labels on LimeWire Licensing Scheme
- MP3.com, EMusic and Others Merge.
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