From: velde@gopher.Stanford.EDU (Francois Velde)
Subject: Re: price of CDs (was Re: EMI price increase)
Organization: ^
Date: Tue, 13 Oct 92 17:16:47 GMT

In article <1bd54gINNerh@calvin.usc.edu> alves@calvin.usc.edu (William Alves) writes:
>
>.>Why, then, are CDs about twice as expensive as cassettes, when the cost of
>.>manufacturing is only about 10%-20% greater? 
>
>>Because they are not the same object. I will pay more for the same music
>>on a medium that lasts longer, does not deteriorate, produces better sound, etc.
>
>Ah, then it IS a question of what the market will bear instead of the actual
>cost of a CD (both manufacturing and producing). This is the point I am
>making. The profit margins on CDs are far greater than the profit margins
>on cassettes or LPs for that matter. It is not a case of performer wage
>inflation.
>
Good point, but let me  correct myself. I explained why I, as a consumer, 
can pay more than for a cassette.  But to explain why companies can take 
advantage of my willingness to pay, you need one of two explanations:
either production costs *including* performers' wages justify the high
price of CDs, or 2) the companies collude. Otherwise, if there was any 
unjustified profits, a record company could lower its price and get all
the customers. The first explanation goes back to my "rent" theory below.

>Michael Jackson is unlikely to recieve an upfront $1 or $2 million. He
>receives a royalty which I believe is on the order of 10 cents per song
>per CD. Of course it is different with an orchestra; they are paid up
>front and only the composer generally receives a royalty. But it still
>works out to just 2 or 3 dollars per CD. Significantly less in some
>cases (a solo classical guitarist, for example).

Where does the figure come from? Are all performers paid a linear function of
the number of CDs sold? Is that function the same for all performers?
>
>>Either two CDs produced by two different companies are close substitutes,
>>and then there is no reason to believe the two companies would collude
>>to keep prices up: 1) it is illegal: write to your neighborhood branch 
>>of the Anti-Trust Office 
>
>By the letter of the law I doubt that there is collusion. I don't think
>the record executives are calling each other to discuss changes in pricing.

The law can and is interpreted flexibly, I think.  If there are unjustified
profits in the CD business an investigation is warranted.

>>2) each company has an incentive to lower prices
>>and snatch all the customers.  Or they are not substitutes: then you are 
>>paying not DG or whomever, but your are paying H. v. Karajan or Pavarotti
>>for the unique talent which he finds himself the owner. That's a rent,
>>the same way exceptional sports players earn rents on their unique talents.
>
>This is closer to the problem. It's not like selling potatoes, is it?
>Price is often not the first criterion in buying a recording. Instead,
>each record company has a "monopoly" on the artists who have signed
>exclusive contracts with them. That is the source of the inflated prices,
>especially in pop music, I would think. The products are NOT necessarily
>substitutes, as you put it, but the money I pay isn't going to Karajan
>or whomever, it's mainly going to the record companies.

If that is the case, Karajan should have gotten a different agent. If
the rent belongs to the artist, he can bargain with the companies to
extract it from any contract, by threatening to go to another producer.

I'm not trying to argue that there can't be collusion in the CD market,
but I'm pointing out that it is not obviously true. If Pavarotti is rich, 
it's not because the CD companies are price-gouging on Pavarotti CDs,
it's because he has a special something that belongs to him only, and
that many people are willing to pay to hear.

Newsgroups: rec.music.classical