Price Discrimination: An Example

The rental rates on iTunes are fairly well established. You pay most for a new HD release, a little less for an older movie, and less yet for non-HD.

But one movie on iTunes rents for more than double the usual, highest established rate. What’s going on here? Should we send in a “rogue economist,” perhaps, like the dudes of Freakonomics fame?

Well, they would know, since it’s their movie. Freakonomics: The Movie, that is being rented on iTunes for more than double the regular rental price. And, though this may be just the kind of puzzle Levitt and Dubner like to fix upon, it really doesn’t require much vexation to puzzle out. It might best be considered an example of price discrimination. As I pointed out on my blog yesterday, identical goods in the same market are, in theory, supposed to have the same price. But venders realize that some segment of the market will usually pay more for the good than the rest of the market. And that it sure would be nice to charge them the higher price. So what can they do?

They can either somehow reconfigure the good so it seems distinct from the lesser-priced version, or else offer the good in a separate market.

In this case, Freakaonomics: The Movie, gets special treatment on iTunes because they’ve found a criteria that can make of it a separate good: It’s a good now rather than a good then. That is, the documentary film has not hit theaters yet. So it is not a newly released digital version of the theatrical release, but (get this) the pre-release digital version of the theatrical movie. This allows the film’s owners, and iTunes, to distinguish it from all the rest of the films offered on the digital download service. And charge more.

As a more expensive movie than it will be in the future, the vender can therefore charge more to that most reliable of audiences, the Early Adopters. In this case, it’s those folks who want to see something as it first becomes new. They are more concerned with time than price. Price-shoppers, on the other hand, will wait to consume the movie.

I suspect we’ll see more such price discrimination on iTunes, in the future.

For my part, I’ll be a price shopper in this instance. I’ve read the book. I don’t need to spend double to see the movie right away.

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