Music elasticities and puzzles

Warner Music Group released the following statistics on a decline in expected music revenues from iTunes. Since tiered pricing was introduced (i.e., rather than songs being 99 cents they went up to $1.30 for DRM free and some were discounted), the growth in unit sales went down from 10 percent to 5 percent. This amounts to an expected unit decrease of about 4.5%. So a 30% apparent increase in price caused quantity sold to drop by 4.5%. Sounds like great news for Warner as revenue should rise. But they remarked that revenue was up only 8 percent from an expected 20 percent (as it was last year).

And indeed, Warner CEO Edgar Bronfman Jr. argued that the pricing change has been a “net positive” for Warner. But he also suggested that in hindsight, perhaps it wasn’t a great idea to raise prices 30 percent during a recession.

Actually, I am not sure that this wasn’t a great idea. According to their own data, revenue is higher than it otherwise would be. The fact that it grew alot last year appears to have nothing to do with the pricing decision this year. Indeed, it looks like revenue would have grown even less had they not changed the pricing scheme.

The good news for we consumers is that Warner doesn’t appear to realise this and so will drop their prices and sacrifice revenue. Woo hoo.