Rock music has no place in this column. The proprietor of Café Economics has quaint tastes in music, and is more comfortable listening to Talat Mahmood rather than the Rolling Stones. But this article is an exception to the rule. A rock band named Radiohead has stirred my interest, and of several other economic commentators, because of a daring move. The band has put its new album up on its website, from where fans can download at whatever price they choose.
That’s right: There is no fixed price for the music.
Similar experiments have been tried before, but perhaps never on this scale. Zodiac Grill, the upscale restaurant in Mumbai’s Taj Mahal hotel, did not have a price list at one point of time. Patrons paid what they thought the food was worth. I am told that net revenues did not suffer, since many overpaid.
And then there is the famous experiment recounted in Freakonomics, the wildly popular book by Stephen Dubner and Steven Levitt. Paul Feldman, an economist-turned-bagel delivery entrepreneur in Washington, DC, decided to leave his cash box in the offices where he delivered his bagels. That saved him time. He did not have to wait till his customers paid him and could, hence serve more companies.
There was a note on the cash box that asked customers to leave what they owed Feldman. You would think that he would end up with nothing, as cheapskates (or rational consumers —take your pick) helped themselves to a free bagel. That did not happen. Payments tended to average around 90 cents a bagel, enough to make it a profitable business.
A restaurant in Mumbai, a bagel man in Washington, DC and a rock band in London. Each has tried to shift the power to fix prices to the consumer, assuming that the price will not be zero. Each of them works on an honour system. The seller appeals to the buyer’s sense of honour to pay what he believes to be the true price of a good or service. The rock band’s experiment also tells us a lot about how trust is the bedrock of the modern market economy.
Not every use of the honour system is based on a payment. When you walk out of an international airport, you are allowed to choose whether to walk out of the green or red channel. There are random checks to discourage those who misuse the system, of course. But any such arrangement will not work unless the vast majority of users respect the honour system and do not abuse it.
Coming back to Radiohead. It is too early to say whether its gamble has really paid off. Downloads started on 10 October, so it’ll be many months before the big numbers can be totted up. But one can try to figure out what the rockers are up to. The ease with which music can be downloaded online, often for free, means that the traditional business model in the music industry is cracking. Musicians will no longer depend on CD sales for most of their income.
It is likely that most of the money earned by musicians will come from live concerts and merchandising. To charge premiums on these, it would be useful to have your music playing in as many homes and bars as possible so that your brand has instant recall. Flexible-price downloads help build up a large network of listeners. The larger the network you build, the larger your future income.
Radiohead’s move looks like a stroke of genius.
The new pricing model also throws some light on the nature of value and prices. Ever since the 1870s, most economists have accepted the fact that value is subjective. Each of us has a different sense of how much something is really worth. Some may believe a new Himesh Reshammiya CD is worth Rs5 while there could be others who are willing to put Rs500 on the counter to buy his nasal hits.
No amount of computer modelling and quantitative gimmicks can match the complexity and information-processing prowess of the market.
Radiohead’s great gamble may not work after all. Horror-story writer Stephen King tried something similar a couple of years ago. He started serializing a new book online, chapter-by-chapter. Readers could get the chapters for free, or pay King whatever they wanted to.
The experiment fizzled out. Actually, King had structured the deal in an interesting manner. A reader was downloading a chapter, reading it and then downloading the next chapter. So, the reader had an incentive to pay up. Reading half a novel is no fun. Novels are an indivisible product. Ideally, pricing should have peaked as the novel’s climax approached.
Radiohead’s unusual pricing strategy may or make not succeed. But we should not be surprised if many more such experiments crop up in the years ahead, especially on the Internet. It’s unlikely that you can choose your price for a car or a house, but flexible pricing can come into its own as far as digitized products are concerned.
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