Nominal Price Rigidity

May 24, 2007

Can “nominal price rigidity” perhaps be the problem for more flexibel pricing in the digital content world? Tim Harford wrote for the Slate magazine an very good article about “nominal price rigidity”. He describes it like that:

“My salary is not tweaked each month to reflect the latest inflation figures, and neither is yours. Restaurants do not reprint their menus, nor wholesale firms their catalogs, if the cost of their inputs changes by a penny.”

“Technology makes it ever easier to change prices using bar codes, Web sites, and laser-printed menus. Amazon always seems to be changing book prices. Coke vending machines now take very little effort to reprogram. So, should we conclude that “menu costs” no longer matter?”
“A prize-winning paper from Carlos Carvalho recently showed that it does not even help if many prices adjust quickly, because those that change slowly will distort the rest. Amazon may be able to adjust its prices easily to reflect its costs, but that is of little use if those costs are distorted by slow adjustments from the bookbinders or the freight handlers.”

Of course there are some parties in the digital media value chain that can´t  or don`t want to change there prices fast.

The Problem?

“(…) prices need to be able to change relative to one another to reflect demand and the underlying costs of production. If prices don’t adjust smoothly for any reason, then the economic consequences could be serious. If wages can’t fall in a recession, then people will lose their jobs instead. If the price of a car or a restaurant meal can’t fall when demand does, sales will collapse with much the same effect.”

However, what you do have is Steve Jobs and his insistence on maintaining a 99-cent price for individual song downloads. And even though inflation has been relatively muted in the four years since the launch of the iTunes store in April 2003, it compounds out to nearly 12% — around 2.86% each year.

Which means that in today’s dollar, you paid about $1.11 for an iTunes track when the store first launched. Or, you can turn it around and say that you’re now paying just 88 cents a track in 2003 dollars.


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