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"What Price Music? How Your Favorite Song Went On 99-Cent Special
Source: The New York Times, October 12, 2003. Many of you have probably downloaded music from the Internet or shared music files with friends. Even if you have not, you are probably aware that a revolution is occurring in the music industry. This revolution was prompted by technological innovation, the development of digitized music. This innovation is unlike previous shifts from vinyl to cassettes to compact discs. Record labels and other businesses are struggling to find a way to make a profit from a product that consumers can obtain—illegally but easily—for free. The article "What Price Music?" explores how the emerging legal providers of downloading services are determining the prices of their products in a rapidly changing market. The price seems to be settling at 99 cents per song. According to the anecdote told to reporter Amy Harmon, this price was rather arbitrarily arrived at by Steven P. Jobs, Apple's chief executive. Apple was one of the first companies to sign major deals with record companies to legally provide music downloads. At first, their product was only compatible with their operating system, but in the last few years they have moved into the larger P.C. (IBM-compatible personal computers) market that largely operates in a Windows environment. Apple's i-Tunes has become the price leader in this market, and the article shows how rigid (or "sticky") prices can be in an oligopolistic market. According to the article, other companies have tried to increase their market share by offering lower prices. For example, RealNetwork's Rhapsody service attempted to undercut competitors by offering music at 49 cents per song. Their sales tripled but profits did not. Similarly, Napster's research indicated that lowering the price to 75 cents would not generate sufficient sales to offset the lower price. These stories suggest that the industry already has a kinked demand curve. Below the current price of 99 cents, demand is inelastic and so lowering the price does not increase sales by enough to offset the lost revenue per unit sold. (Remember: Total Revenue = Price x Quantity Sold) Questions for Discussion:
"Cellphone Deals Sweeten in Face of New Rule on Keeping Number"
Source: The New York Times, October 18, 2003. Cell phone customers have been reluctant to shop around for the best deals because changing their cell phone number seems like a hassle. Each time you change providers, you have to make sure that everyone who calls you has the new number. That's fine if you use your phone just for emergencies or to keep in touch with family members. But if a wide circle of friends or of business contacts use the number, changing it is not easy. Enter the Federal Communications Commission, the federal agency that regulates the market for telephone service. In order to increase the level of competition within this oligopolistic industry, the FCC instituted new regulations that allow customers to transfer a cell phone number when they change providers. Eventually, you will even be able to transfer a land line number to a cell phone. Because there are only a handful of cellular phone providers who can carefully monitor each others' actions, competition for customers has been fierce. Since the industry is oligopolistic, a company's profits depend upon maintaining and expanding its market share. To reduce customer turnover, especially in light of the new regulations, cell phone companies are providing lots of incentives to customers who sign long-term contracts. They hope to lock in their customers before the regulations take effect. Customers who are aware of the changes are driving hard bargains, hoping that they can get good deals while the companies are nervous about losing customers. Questions for Discussion:
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