Does One Price Fit All?: A Study of Pricing in the Market for Music Downloads

Abstract: 2005 saw a tripling of worldwide sales of music over the Internet and on mobile phones. With 420 million legitimately sold single tracks, accounting for 6 percent of global record company revenues, the $1.1 billion digital music market is beginning to take shape. Fully functioning services for buying music online legally are now available, with catalogues of songs counting in the millions. An important piece of the puzzle is missing, however. Despite strong theoretical arguments for differentiated pricing according to consumer demand, prices for music downloads are strikingly uniform. Focusing mainly on the Swedish market this thesis explores various obstacles and pitfalls to implementing differentiated pricing and attempts to answer the question why the uniform pricing regime persists. Representatives for the four major record companies are interviewed, as well as the CEO of the largest digital music retailer in Sweden. Behavioral explanations, transaction cost explanations and market structure explanations are considered. While none of the explanations presented can be singled out as a definitive answer to the question why prices are uniform, it is argued that they in combination likely limit the possibilities to implement differentiated pricing in the industry.