iTunes and fixed prices

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As you've no doubt heard the music industry wants Apple to replace their $.99/song flat rate pricing at the iTunes Music Store with variable pricing.
Virgin and HMV music retailers both recently opened digital music stores in the U.K. that sell downloads using variable pricing.

"Not all music is worth the same," Mulligan said. "Madonna's latest album is worth more in the early weeks of release than an old Pink Floyd album. Though consumers will have to pay more for some songs, they will also get many much cheaper. Online stores can thus run sales in the same way that traditional music retailers do."

It's obvous why the music companies think they want this: they think they can extract more money from users. I'm not so sure. Remember that because the marginal cost of production is essentially zero, any particular price point is basically arbitrary from the consumer's perspective. $.99 has the advantage of being a focal point, and so fair-seeming (note that the price is also .99 in both Canadian dollars and Euros). If customers start thinking too much about the arbitrariness of the prices, they may decide that those prices are basically unfair and record companies may find that they aren't able to sell any music at $.99.


Isn't it amazing. The recording industry seems to be hell-bound and determined not to give their customers what their customers want.

One other reason may be that they try to manipulate public perception of the value of the tune through pricing. From Joel on Software:

Now, the reason the music recording industry wants different prices has nothing to do with making a premium on the best songs. What they really want is a system they can manipulate to send signals about what songs are worth, and thus what songs you should buy. I assure you that when really bad songs come out, as long as they're new and the recording industry wants to promote those songs, they'll charge the full $2.49 or whatever it is to send a fake signal that the songs are better than they really are.

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