NBC vs Apple

This post is a few years old but it is still relevant to uniform pricing as the price wars had only just begun when the article came out. The article is NBC chief warns over iTunes pricing. It was an interesting article having to do with uniform pricing and how big of a deal it is in the media industry. The text mentions that uniform pricing is the least profitable of all pricing measures given. There is no discrimination and the price is just set at a price where the company thinks it will remain profitable and have the highest demand.

The downside to uniform pricing is that it causes inefficiencies in sales and an item that is in more demand will be sold for the same price as something with the least demand. I think Apple decided to do this, and set its price at what it did, because it could. Apple did not need to do as much research for uniform pricing as it would have on complete price discrimination. The book mentions that complete price discrimination is the most profitable but also requires the most research and information. Uniform pricing is great for Apple because if they see that the demand is falling off, they can lower the price across the board and this is much easier than trying to guess which band, or show, will be the next and greatest hit.

Apple did do some research on which price point would be the most profitable and would demand the most from its consumers. This helped them set the price point at what it is set at. In Apple's case, I think they went with the best pricing program that they could have chosen. It was easy to implement and can be changed just as easily.


Maya said...

This article was written in October 2007, since that time apple has modified it's pricing structure slightly. Individual songs were priced at $0.99 and now may be priced at $0.79, $0.99, or $1.29. Similar changes have occurred with all products on the site. While Apple did not listen completely, the message from NBC and other sources was heard and understood.

Lucas said...

Thank you for that information Maya. I do not do anything with iTunes so I was not aware of the pricing change. I hope it was the right move for them to change their pricing and that they are more profitable because of the change. Fo they structure their pricing based on demand of the product or how does that work? I was just curious to know if they have changed from completely uniform pricing to using some sort of pricing discrimination now that more information is available at a lower cost to Apple.

Audrey said...

The text mentions that when selecting a pricing strategy, demand is not the only thing to consider. Cost is a major element in setting a profit-maximizing price, and although Apple saved money in research expenses, they might not have considered the cost of loosing support from NBC. Apple has since repaired relations with NBC and like Maya said, changed their pricing strategy.

Maya said...

The pricing seems to be based on the length of time that the item (a song for example) has been available on the market. The older items are less expensive. Full albums are $7.99 and $9.99 which also is a change.
WIth the Itunes Genius feature turned on the program will offer to bundle specific albums for you when you already own a song from one particular artist. This means that you are able to purchase the remaining songs on the album at a reduced cost.
Itunes also has movies that can be rented (available for 3 days) or purchased (you own it for good) range from free to 14.99 depending on which movies are featured for the week. The rental option seemed to come about the same time as the music pricing change.
Television shows are now $2.99 for an individual episode and $22.90 to $49.99 for a season pass, depending on the popularity of the show and the length of time it has been since the season ran on television.
Itunes still offers University Courses called Itunes U free of charge for all users. These podcasts are available by the single episode or through a free subscription. Many well known Universities have chosen to post their lectures on this site for use of everyone.
It seems to be that as the popularity of the program /service has increased and the data available has increased, Apple has chosen to make changes that make sense for their customers.

Blake said...

I feel that uniform pricing is easier to do than complete price discrimination. I agree there would be less costs in research on how much to price a uniform pricing model verses a complete price discrimination model.

Jayden said...

If any industry has the wherewithal to employ complete price discrimination, I would think it would be the electronic download industry. They have considerable amounts of data literally at their fingertips, and discriminatory pricing really shouldn’t be that hard. The fact that iTunes has only a few standard prices (thanks Maya), makes me wonder if their simplistic pricing has more to do with marketing and customer satisfaction than it has to do with squeezing out profit per download.

Dr. Tufte said...

-1 on Lucas for a spelling error.

You know it's possible that economists don't know everything!

We include what we do know in texts about things like uniform pricing. But this doesn't mean it is a good explanation for all the instances of uniform pricing that we see in the real world.

iTunes is a great example of this. So are movie tickets, books, tickets to sporting events, concerts, and a host of others.

What's interesting is that these things are priced uniformly, and they probably shouldn't be. Why aren't tickets to good movies more expensive? Why do a few rare authors get to sell their books for a true premium, when most successful ones are merely permitted to write larger ones that can be sold at a higher price?

This gets at Blake's point that non-uniform pricing is just too expensive to research and plan. It's interesting that in entertainment goods like this - where those research costs are fairly low - uniform pricing (or something close to it) exists.

These are true pricing puzzles. In this case, it's also puzzling why NBC is worried about iTunes pricing, when they are just offering a different form of uniform pricing (the suffering through 8 minutes of commercials every half-hour).

Now, Maya raises a good point that Apple has modified their prices. But, some of this is attributable to Amazon and Wal-Mart offering lower prices for similar products.

And ... realistically, to a tween, is the price of a new Miley Cyrus song a mere 30% higher than some obscure song from the 70's that they also sell on iTunes?

Maya's second comment is also interesting. If prices actually decline with length of time they've been available, then this means that Apple is recognizing that iTunes are a durable good, where a sale merely shifts purchases, but has more trouble creating new ones.

In the end, I think Jayden may be right. Perhaps non-uniform pricing would just alienate customers in this market. I think that opens up a new question though - why this market and not others?

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