Chapter 7 Case Study: iTunes Music Pricing
Since April 2003, Apple Computer’s iTunes Music Store has allowed the consumer to purchase music and digital books over the Internet with success. They paid particular attention to ensure that their iTunes library interfaced with their Apple products, creating a great MP3 player on a device that also provided other services to their customers in one bundled product. Their shares increase significantly over the next 2 years as a result of their success. Their product became a platform for the digital music business to explode into the industry it is today. This also made digital music affordable to the consumer who may have resorted to illegal downloads in the past which in turn ensured that the music industry was getting paid for their product as well. The 99 cents per song download provided for 70 cents to be paid to the record companies and the remainder (29 cents) was Apple profit. By August 2005, some of the larger record companies felt that their product was underpriced and requested that flexible pricing be instituted. Music executives felt that Mr. Jobs did not have any incentive to raise prices because it would affect the sales of his Apple MP3 devices (Brickley, Smith & Zimmerman, 2009). However, this was not a shared opinion by all, the fear was that the market might not be stable enough to survive a price increase when illegal downloading was rampant among file swapping sites. A price increase would encourage this type of activity to continue to flourish and no one would be making money. Apple was able to win the debate on keeping their prices the same because of their significant market power, however by January 2008, Amazon.com entered the market place with a similar product for customers without all of the restrictions that were placed on music in the iTunes Store.
1. Provide an argument for why a variable pricing policy might increase the sales revenue from...