Universal Music, the world’s largest music company, is planning to reduce music CD prices from about $18.99 dollars apiece to $12.99. This is a major slash in prices, over 30%. None of the other 4 major music companies (Sony, EMI, Bertelsmann AG, or Time Warner) has promised to lower prices.
This strategy is obviously an attempt to lure more customers into the record stores and get them to buy more CD’s, as the music industry has suffered tremendously in terms of sales since the popularity of online file trading tools like Kazaa has increased. The record companies have other methods of thwarting online music sharing as well: recently, the RIAA (Recording Industry Association of America) has started suing online file sharers. This has been seen as extreme, so Universal is deciding to cut prices instead. However, the prices may not be lower in the actual record stores, as retailers may charge whatever price the want for the CD’s.
The recording industry is desperate for more sales, and they are even willing to lower prices in order to obtain them. Fig 1 shows the equilibrium price1 diagram of CDs. If the price of CDs is low, as at Point A, the number of sales will be high, as at Point B. On the other hand, if the price of CD’s is high, as at Point C, the number of sales will be low, as at Point D.
Many people, including myself, do not buy CDs because of the very high price that is charged for them. They do not consider the cost of the CDs to equal or outweigh the benefit. If more people start to feel this way, sales will obviously go down, and will plummet further because of how easy it is to download high quality, sharable songs for free. As a result, the price of CD’s should be kept at the point at which the graphs for Price and Sales intersect in Fig. 1, or the equilibrium price. We don’t yet know whether or not $12.99 is the equilibrium price, but we will know soon whether it is close.
As previously stated, the price of CDs is much too high for people to buy them and feel like they are truly getting their money’s worth, or receiving a good benefit. Potential customers also avoid paying almost $20 dollars for a disc that they will only enjoy one song from. Instead, they can easily get on to a file sharing tool like Kazaa and download songs for free, like millions of other people. Universal Music is taking a step in the right direction by lowering their prices, but we do not quite know whether the prices are low enough. The companies will have to adjust their CD prices by trial and error until we reach the equilibrium price for CDs, where both the music companies and customers believe that they are receiving a benefit greater than or equal to their cost.
1. Equilibrium Price – The price in a market of good where the price set by the producers equals the demand of the consumers.