Working Paper: NBER ID: w15390
Authors: Ben Shiller; Joel Waldfogel
Abstract: Economists have well-developed theories that challenge the wisdom of the common practice of uniform pricing. With digital music as its context, this paper explores the profit and welfare implications of various alternatives, including song-specific pricing, various forms of bundling, two-part tariffs, nonlinear pricing, and third-degree price discrimination. Using survey-based data on nearly 1000 students' valuations of 100 popular songs in early 2008 and early 2009. We find that various alternatives - including simple schemes such as pure bundling and two-part tariffs - can raise both producer and consumer surplus. Revenue could be raised by between a sixth and a third relative to profit-maximizing uniform pricing. While person-specific uniform pricing can raise revenue by over 50 percent, none of the non-discriminatory schemes raise revenue's share of surplus above 40 percent of total surplus. Even with sophisticated pricing, much of the area under the demand curve for this product cannot be appropriated as revenue.
Keywords: uniform pricing; digital music; pricing strategies; consumer surplus; producer surplus
JEL Codes: L12; L82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pricing schemes (D49) | revenue (H27) |
| pricing schemes (D49) | consumer surplus (D46) |
| person-specific uniform pricing (P22) | revenue (H27) |
| sophisticated pricing (D49) | revenue capture (H27) |
| non-discriminatory schemes (J78) | revenue share of surplus (E25) |