The iTunes experiment

April 20, 2009 in Economics

The first week of results on iTunes' tiered pricing are in and they are positive.  According to a Billboard report, songs which experienced price hikes of 30% sold only 12.5% fewer units (only 6.9% fewer if you ignore "the expected second-week drop of Black Eyed Peas' Boom Pow Pow" - a wholly un-justified remark which this statistician is forced to ignore). This means that digital tracks do in fact exhibit price elasticity, a belief I've held without verification for many years.  In fact, the elasticity appears to be greater than 2 (30/12.5).  However, a few caveats:

  1. The sample is ridiculously small and the data extremely noisy
  2. Songs in the sample that remained at $1 sold 9.9% more units than the previous week
  3. Sales of all digital tracks increased 3% week-over-week, and songs in the top 100 increased 1%.

If the control group's sales really increased 9.9%, then the drop of 12.5% in the higher-price group is actually a drop of 22.4% relative to where they should have been - yielding a much smaller elasticity (though still greater than 1).  The true number is likely somewhere in between, since the price hike probably drove customers to purchase the control group (making it not a control group at all!)

Using a number of 6%, which is between the control group's 9.9% and the population growth of 3%, the elasticity is 1.6. It's too early to draw conclusions, however.

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