From: pkbockus@gsbphd.uchicago.edu (Keith Bockus)
Subject: Re: CD prices
Organization: University of Chicago Computing Organizations
Date: Mon, 28 Dec 1992 08:07:20 GMT



I just want to comment on Francois Velde's comments about Chris 
Brewster's (or Dave Lampson's?) comments on R. Goiffon comments 
about the price of CDs...

*** warning *** warning *** warning ***

>The author is an economist. Proceed at your own risk.

As is this one, albeit a mere PhD student.
However, I'll try to address my comments to the laity :-) 


For the most part, Francois Velde gave a fine account of 
breakeven price/volume relations in the presence of fixed
cost.  A couple of comments and quibbles, however...

Quibble #1:

>tells us that today's CDs give us more music for the buck ($16.75 being the
>close to the upper bound on CD prices in the US).

Francois is no doubt correct, but Goiffron's argument
is irrelevant.  Saying that the real price of CDs has
dropped is not even remotely an argument that CD prices 
should be higher.  The relevant questions are 1) "What
are we willing to pay for CDs," and (perhaps more importantly)
2) "What are Goiffron's competitors willing to sell them for?"

Imagine your computer salesman trying to sell you an IBM 8088 machine
with 64k for $5000 because "it's cheaper than it was in 1980," and
you get the idea. 

Comment #1:

Goiffon writes:
>>"For example a $60,000 recording released as a well-presented, well-
>> documented CD retailing at $15 needs to sell almost 25,000 copies
>> worldwide just to break even.  

The head of the Naxos label was quoted in Pulse magazine (a Tower
Records freebie) as saying that he spends no more than $30,000
making a recording, because he records with just the performers
and one engineer.  He states that many of the major labels spend
$60,000+ by having all manner of hangers-on present at the sessions.
Mr. Goiffron may well be suffering the effects of corporate bloat.

As a side note, the Naxos fellow stated that he does not pay
"superstar wages" to his performers.  You may note that this results
in Naxos not having "superstar" performers, but the second best
is getting pretty good these days.  The Oxford Camerata may
start eating the Tallis Scholars' lunches when the relative
prices are $6 vs. $18.  

Quibble #2:

>marginal cost is $6 ($2 manufacturing + $4 retail margin).

A marginal cost of $6 is highly unlikely, since Naxos CDs sell for
$6 normally and $5 on sale. Note that most of the things we 
associate with "quality" are fixed costs, so Naxos' marginal
costs should not be any lower than HMU's.  I doubt that Naxos is losing
money on every sale or failing to cover fixed costs.

Quibble #3:

>It is left as an exercise for the reader :-) to add the demand curve to 
>the above plot: suppose a downward-sloping curve (the higher the price, 
>the smaller the demand), and you can see graphically that it would require 
>a very steep curve to make it worthwhile for the industry to move to lower 
>prices.

While one may doubt that the *industry* demand curve is terribly steep,
it is the *firm* demand curve that is relevant to Mr. Goiffron.  
A firm sees a marked falloff in demand once it's prices rise
above those of the close substitutes.  It is thus not implausible 
that dropping prices to it's competitors' (e.g. Polygram) levels 
would result in a dramatic increase in volume.  Price $1 below
the competition, and they'd probably have to add extra shifts
at the factory :-)

>Otherwise, I agree with most of what Chris Brewster wrote, and I certainly
>find Goiffon's plea clumsy and unconvincing, to say the least.

On this, we agree wholeheartedly :-)

Keith Bockus
Newsgroups: rec.music.classical