Visions of media technology, such as the metaphorical "information superhighway," typically oversimplify consumer attitudes toward pricing. Prices are usually framed in terms of how much the consumer is willing to pay for a given service, and it is generally assumed that consumers have a price ceiling for a specific product.
There is ample evidence, however, that for information and entertainment goods and services, consumer responses to pricing are anything but simple or linear. Information is a product like no other. The price of information changes the nature of information, and its resulting desirability. One example is the pricing history of the compact disc.
When the compact disc was introduced, its price was about double that of the product it replaced, the LP. At the time of its introduction this was not surprising, as CDs represented new technology; the volume was low, the production capacity was rarefied, and the development expenses were still fresh on the books. What was surprising, though, was that the price of CDs remained high even when the cost of production fell to the point that CDs were cheaper to produce than LPs had been.
Today, more than a decade after their introduction, CDs are cheap to make. Yet their price in real dollars is still a little higher than that of LPs at the time of CDs' introduction (without allowance for inflation, the price is still about twice as high). Thus the producers' profit margin is significantly higher than it ever was for LPs.
Conventional wisdom doesn't square with this riddle. Since LPs are no longer generally available, the CD is not a niche product for aficionados anymore. It is filling the same role that LPs once did. Why hasn't competition forced the price of CDs down to reflect the cost of production?
One explanation is that the market hasn't been allowed to function. In the years following the introduction of the compact disc, the large consumer electronics companies that were capable of manufacturing CD players – such as Sony, Philips, and Matsushita – bought up record companies. By the end of the '80s the record industry was more or less owned by the consumer-electronics industry. The paranoid might wonder if this wasn't a grave antitrust problem – diversity in culture threatened by the centralization of power and ownership in the record/consumer-electronics business.
In fact, there might very well have been an antitrust conspiracy of sorts in this case, but if there was, consumer behavior turned it on its head.
Despite the increased price of CDs, and despite generally poorer economic conditions for consumers, unit sales of CDs have been increasing. Far more CDs are sold, by any measure, than were LPs. In 1993, according to The Recording Industry Association of America, manufacturers shipped nearly 500 million CDs; in 1983, however, when CD sales hadn't yet broken the 1 million mark, only 209 million LPs were sold. This cannot be explained by a higher popularity of recorded music overall. There is no corresponding increase in sales of other music products and services, and the LP era included the record boom of the '60s and phenomena such as Beatlemania.
What's going on? In a nutshell, the higher profit margins of CDs have changed the nature of the product. Higher margins have created a market of greater diversity in which consumers are more likely to get what they want. To the consumer, the music is the product, not the manufactured disc. The record industry has engaged the record-buying public in detail, rather than by broad brush, and this results in more points of contact and higher sales.
During the LP era, esoteric music, such as music by avant garde composers, music of other cultures, and early Western music, was manufactured through patronage. For example, classic blues recordings were often made available by entities like the Smithsonian Institution.
With the advent of the CD, however, it became possible to make money on low-volume records. Therefore, the risk of bringing out a new record with an uncertain market was lowered. This created a larger field of contenders so that more potential big sellers could be discovered. It became economically feasible for exploratory niches, such as the alternative rock market, to exist in great numbers.
Without any central plan, without anyone predicting it, the higher margins of CDs created a product of greater marketability and diversity. Instead of a monolithic market clinging to a few styles, there are now a multitude of profitable niches. The pop charts published by Billboard in the summer of 1994 contain a Gregorian chant album, a postmodern Polish symphony, and records produced by tiny start-ups. Consumers are paying more to get the product they really want.
It would be too simple to say that LPs had merely been under-priced. The LP industry thrived for decades. Still, no one suspected there was another type of market, one that was indeed larger, waiting to be discovered when margins were higher.
According to quantum mechanics, an electron can reside anywhere in an atom, but it strongly tends to run in certain "ruts" or orbits. When energy is added to an atom (from a photon), an electron might be bumped to the next energy level and then reside in a stable manner in a higher orbit. It is exceedingly rare for an electron to lie between orbits.
This is a helpful metaphor for understanding the consumer psychology of pricing for information and entertainment products. In the case of the LP and the CD, we see two energy levels that consumers can fall into (and there are perhaps more). There is no reason to doubt that the LP energy level (of lower margins, less diversity, and less overall volume) is still an available option, but the CD demonstrated the existence of a higher energy level, which is also stable.
This has import for the information superhighway industry. From a cable operator's point of view, the information superhighway might be cynically described as a way to charge more for television, without necessarily improving content quality. But if consumer behavior toward CDs serves as a valid precedent, the "higher quantum level" pricing of the information could reward content rather than access, opening new markets, increasing diversity, and giving consumers more of what they really want. The superhighway might differ from intentions, even if the intention is schlock.
