And the Band Played On

Understanding how changes in an industry lead to changes firm profitability, and hence strategy, is often difficult to detect. Even when drastic changes occur within a decade, as in the music industry, it takes a careful eye to uncover these effects. In Joel Waldfogel's recent paper, "And the Bands Played On: Digital Disintermediation and the Quality of New Recorded Music," he brings together a number of different analyses that document the evolution of this industry. Some findings are:

• While the number of major-label album releases fell, the total number is up.
• This has been accompanied by less concentration of sales in the top albums. 
• Internet radio and online criticism have altered how consumers get product information. 
• Albums are finding commercial success without traditional radio airplay. 
• Albums from independent labels account for a growing share of successes.

These changes are likely to have undermined the profitability of major labels and top radio stations, much to the benefit of musicians.

Even Entry at the Bottom Affects Incumbants at the Top

A new paper by Bhaskarabhatla and Chatterjee, "How Do Incumbents Respond to Bottom-of-the-Pyramid Firm Entry?," examines what happened when an unconventional generic pharmaceutical firm entered the Indian market. Mankind Pharma entered by selling very small package sizes to the lowest income segment of the market. Of course, wealthier customers could buy at the reduced prices. The paper documents the reduction in price dispersion and in price levels. Notably, prices fell in anticipation of the entry, when incumbants learned that entry was eminent. From their conclussion:

Our results suggest that facilitating the entrepreneurial activity of BOP (Bottom of Pyramid) firms can curb price dispersion. In contrast, India’s drug-price controls, which are formulated by incorporating prices of branded drugs in markets, may fail to substantially reduce price dispersion but delay the launch of new drugs in India.

How Steve Jobs bargained with Harper Collins

A side benefit of the antitrust trial is that the negotiations between publishers and Apple are now being made public.  It illustrates what we call the "non strategic" view of bargaining, that the alternatives to agreement determine the terms of agreement. 

Steve Jobs lays out these very clearly, and Harper Collins agrees to his offer:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.
2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

Missed Pricing Opportunity in Barcelona

I am lucky enough to be traveling in Barcelona now (ostensibly for work). When we looked into taking the cable car to the top of Montjuic, I noticed the prices as posted below. Notice the bundling. The second ride is much less expensive than the first. But the same prices schedule was posted at the top of the hill as the bottom. Since the demand for traveling up is much greater than the demand for traveling down, I hoped to see price discrimination based on direction of travel.

We walked down.

Why Dell is a Target

Competing bids to take Dell Computers private highlight the woes that have befallen the firm. David Gelles and Chris Nuttall paint a troubling picture in "Dell committee redoubles efforts to push Silver Lake deal." From a recent presentation regarding various offers:

• PC market share  fell from 15% to 11% in the last three years.
• Software and services market share is just 1%.
• Revenues keep missing targets.
• Profits have halved over the past 10 months.
• The server business risks commoditisation.

As the article states:

The slides paint a depressing picture of the state of Dell’s business, sending a message that investors’ best option would be to take the money on offer.

Do the Rolling Stones Need to Price Discriminate More?

So claims Peter Smith in "Demand elasticity and variable pricing as illustrated by the Rolling Stones." He noted that the recent show at the Staples Center in Los Angeles did not sellout its allocation of $600 seats as expected. Instead, the concert promoter released extra $85 seats to fill the arena. This was the launching point for a discussion of concert price discrimination (called 'variable pricing' in the article). The trick is to identify less elastic customers from more elastic customers and there are mechanisms.

The other interesting point to note in the tickets market is the growth of premium tickets. That might mean you get into a “VIP area”. Or even a meet and greet with the band, a signed picture or something.