iTunes and fixed prices

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.