Well, what d'you know: Raising e-book prices doesn't raise sales

Perhaps there is life in that dog of a neoclassical price system


Worstall on Wednesday One of the things those within economics think that the subject gets generally correct is microeonomics, which itself is generally a discussion of the price system. There are those who insist that this is all well, true, insisting that since we're not all rational agents, don't have perfect knowledge, then that standard neoclassical model is wrong.

This then means that the Fat Controller should be telling us all what to do, which doesn't seem all that much better to be honest.

However, the real point here is not what is absolutely and exactly true down to the last detail, but what theoretical framework explains much of our world pretty well? At which point a quick peek at what's been happening to e-books ever since publishers raised prices might be instructive:

When the world’s largest publishers struck e-book distribution deals with Amazon.com over the past several months, they seemed to get what they wanted: the right to set the prices of their titles and avoid the steep discounts the online retail giant often applies.

But in the early going, that strategy doesn’t appear to be paying off.

Three big publishers that signed new pacts with Amazon – Lagardere SCA’s Hachette Book Group, News Corp’s HarperCollins Publishers and CBS Corp’s Simon & Schuster – reported declining e-book revenue in their latest reporting periods.

It's worth pointing out that over the same time scale Amazon showed increasing revenue: meaning that if the higher priced traditional publishers are getting less then the independents must be getting much more. It's also instructive that the average price of an e-book from the big publishers is $10.81, while the average price of all non-big publisher e-books is $4.95.

Further, since the publishers regained from Amazon the ability to set prices they have raised them and this coincides with the fall in their general revenue from those products.

In detail there's an interesting little pricing puzzle here. Selling a physical book comes with marginal costs per sale: there's the cost of printing and distributing that last book that you've just sold. Thus one cannot adopt a pricing policy which aims to maximise gross revenue: to do so would lead to less profit than adopting one where the marginal book sold covered its marginal cost.

With an e-book the pricing policy should, to maximise profit, be to maximise that gross revenue received. For there's only one set of fixed costs (getting the book written, proofed and uploaded, marketed, assuming that the writer is only ever on a profit share or royalty) and any revenue gained at all from the sale of that last marginal sale is an addition to profit.

All of which is remarkably like what the advice from the standard neoclassical pricing model would be. And we are seeing here that raising prices does lead to a fall off in sales. And, given the cost structure of producing e-books a subsequent falling off in profits.

Do note that the neoclassical model does not say that all firms immediately adopt this wondrous pricing model: only that after however many iterations of trying to maximise profits then that's where the equilibrium will settle down (that this all happens immediately is something found only in the more extreme versions of the models).

We've also another example of something from the standard model, that everything is substitutable. Here is meant that there's a replacement for absolutely anything. Don't like the price of these goods or services then there's something else that can be done or used instead. Wheaties are obviously a substitute for Frosties, but it's much wider than that. A really good play with oneself is just as much something one can do with one's leisure hours as reading an overly expensive book. Meaning that this bloke is wrong:

One high-level publishing executive disputed that the Amazon pacts are behind the e-book sales decline. “This is a title-driven business,” he said. “If you have a good book, price isn’t an issue.”

Again, the standard model doesn't say that there won't be people wrong in that manner. Rather, it insists that they'll get schooled over time in the wrongtitude of their beliefs. As it seems that they are being.

Higher prices reduces sales. Who knew that demand curves slope downwards? Except, obviously, everyone who has ever cracked open page one of the Econ 101 course.

Next page: OMG, LOL MPG

Similar topics

Broader topics

Narrower topics


Other stories you might like

  • Cheers ransomware hits VMware ESXi systems
    Now we can say extortionware has jumped the shark

    Another ransomware strain is targeting VMware ESXi servers, which have been the focus of extortionists and other miscreants in recent months.

    ESXi, a bare-metal hypervisor used by a broad range of organizations throughout the world, has become the target of such ransomware families as LockBit, Hive, and RansomEXX. The ubiquitous use of the technology, and the size of some companies that use it has made it an efficient way for crooks to infect large numbers of virtualized systems and connected devices and equipment, according to researchers with Trend Micro.

    "ESXi is widely used in enterprise settings for server virtualization," Trend Micro noted in a write-up this week. "It is therefore a popular target for ransomware attacks … Compromising ESXi servers has been a scheme used by some notorious cybercriminal groups because it is a means to swiftly spread the ransomware to many devices."

    Continue reading
  • Twitter founder Dorsey beats hasty retweet from the board
    As shareholders sue the social network amid Elon Musk's takeover scramble

    Twitter has officially entered the post-Dorsey age: its founder and two-time CEO's board term expired Wednesday, marking the first time the social media company hasn't had him around in some capacity.

    Jack Dorsey announced his resignation as Twitter chief exec in November 2021, and passed the baton to Parag Agrawal while remaining on the board. Now that board term has ended, and Dorsey has stepped down as expected. Agrawal has taken Dorsey's board seat; Salesforce co-CEO Bret Taylor has assumed the role of Twitter's board chair. 

    In his resignation announcement, Dorsey – who co-founded and is CEO of Block (formerly Square) – said having founders leading the companies they created can be severely limiting for an organization and can serve as a single point of failure. "I believe it's critical a company can stand on its own, free of its founder's influence or direction," Dorsey said. He didn't respond to a request for further comment today. 

    Continue reading
  • Snowflake stock drops as some top customers cut usage
    You might say its valuation is melting away

    IPO darling Snowflake's share price took a beating in an already bearish market for tech stocks after filing weaker than expected financial guidance amid a slowdown in orders from some of its largest customers.

    For its first quarter of fiscal 2023, ended April 30, Snowflake's revenue grew 85 percent year-on-year to $422.4 million. The company made an operating loss of $188.8 million, albeit down from $205.6 million a year ago.

    Although surpassing revenue expectations, the cloud-based data warehousing business saw its valuation tumble 16 percent in extended trading on Wednesday. Its stock price dived from $133 apiece to $117 in after-hours trading, and today is cruising back at $127. That stumble arrived amid a general tech stock sell-off some observers said was overdue.

    Continue reading
  • Amazon investors nuke proposed ethics overhaul and say yes to $212m CEO pay
    Workplace safety, labor organizing, sustainability and, um, wage 'fairness' all struck down in vote

    Amazon CEO Andy Jassy's first shareholder meeting was a rousing success for Amazon leadership and Jassy's bank account. But for activist investors intent on making Amazon more open and transparent, it was nothing short of a disaster.

    While actual voting results haven't been released yet, Amazon general counsel David Zapolsky told Reuters that stock owners voted down fifteen shareholder resolutions addressing topics including workplace safety, labor organizing, sustainability, and pay fairness. Amazon's board recommended voting no on all of the proposals.

    Jassy and the board scored additional victories in the form of shareholder approval for board appointments, executive compensation and a 20-for-1 stock split. Jassy's executive compensation package, which is tied to Amazon stock price and mostly delivered as stock awards over a multi-year period, was $212 million in 2021. 

    Continue reading
  • Confirmed: Broadcom, VMware agree to $61b merger
    Unless anyone out there can make a better offer. Oh, Elon?

    Broadcom has confirmed it intends to acquire VMware in a deal that looks set to be worth $61 billion, if it goes ahead: the agreement provides for a “go-shop” provision under which the virtualization giant may solicit alternative offers.

    Rumors of the proposed merger emerged earlier this week, amid much speculation, but neither of the companies was prepared to comment on the deal before today, when it was disclosed that the boards of directors of both organizations have unanimously approved the agreement.

    Michael Dell and Silver Lake investors, which own just over half of the outstanding shares in VMware between both, have apparently signed support agreements to vote in favor of the transaction, so long as the VMware board continues to recommend the proposed transaction with chip designer Broadcom.

    Continue reading

Biting the hand that feeds IT © 1998–2022