Apple have had arguably a greater influence on the music industry in modern times than any musician. When they introduced the iPod way back in 2001, they basically created the first viable platform for digital music to succeed on. Yes, before the iPod there was MP3 players, but none of them really managed to take off the same way the iPod did. A big reason the iPod managed to be the first real success which kick started the digital age of music was the iTunes store.
The iTunes store gave people an easy way to get music onto their iPods and nearly all songs and albums were priced affordably, €0.99 and €9.99 respectively. However, this pricing strategy was very unpopular with a lot of musicians because it capped the amount they could sell their music for. The strategy is also very unpopular with economists because it imposes a Price Ceiling on a good. A Price Ceiling is a maximum limit which can be charged for a good or service.
And while on the face of it, imposing a limit on the amount a company can charge for their product seems like a good thing, it actually leads to shortages of that good which negatively impacts consumers. If producers are allowed to charge a larger price for their good, then they will produce more of that good because they can make more money. If they are limited in the amount they can charge for it, then they will produce less of that good because they can’t make as much money from it. The figure below illustrates this:
At the first price (in blue) artists can charge €2.49 for their music, and as a result they supply 7 songs. When they are forced to charge the lower second price (in red) of €0.99 they only supply 3 songs. This is because the Price Ceiling being imposed means they can’t make as much money as they want so they choose not to produce as much and as a result there is less music supplied to the market, leading to a shortage.
This example may seem trivial but this is exactly what some artists did back in the day when Apple required any song on their store to be sold for no more than €0.99. In fact it is still happening in the music industry, Taylor Swift for example has even pulled her music from certain streaming services because she doesn’t feel she gets enough money for her music due to the flat rate being charged on it.
By Daragh O’Leary