Wednesday, February 15, 2012

I will alwaaaaaaaaaaaays looooooove yoooooooou

Sony bumped up the price of Whitney Houston MP3 files following the singer's death.

Price gouging claims are usually facepalm-worthy (see the GTM's ice truck story in main paper found in the sidebar). Prices induce a supply side response. In the case of MP3 files, what sort of supply side response is needed?

I can understand a price hike for physical media: the factory needs to press more copies, the copies need to be shipped to retailers and stock personnel need to put the product on shelves (which implies that scarce shelf space is allocated away from competing products). I don't think I know enough about bandwidth limitations to say much about pricing MP3 downloads. My intuition tells me that there is no ex ante allocation justification for an unexpected price hike, but I'm more than willing to be proven wrong. Please let me know in the comments if there is a cost-based economic justification for raising the price of an MP3 download following an (un)expected spike in demand.


  1. Copyright=monopoly=bad pricing

    1. Maybe, but this is more of a demand shock story than a monopoly producer story, I think.

  2. We gonna argue elasticities, bro? No, the real issue is monopoly or competition.

    Supposing the supply curve is perfectly elastic, in the competitive case, the price shouldn't go up. But that's special behavior. In the monopoly case, we have to think about the demand side more (and marginal revenue).

    To tell an Econ 101 story, we'd say that peoples' preferences have changed exogenously, and demand has increased. If you draw this out, we get something like this:

    Note that the price ought to go up in response to an increase in demand, whether we're talking about the theory of a market supply or a monopolist seller. The only difference we should observe between the competitive case and the monopolistic case are the differences in price and quantity, not a change in how the price mechanism operates in response to a change.

    So as usual, the economist can't condemn a business for raising price, but customers have every interest in doing so in their everlong war over surplus.


Do you have suggestions on where we could find more examples of this phenomenon?