6 ms·

The Rationality of One Star Reviews

18 points by siglesias 16y ago

jaysonelliot 16y ago
Dan Ariely makes a baffling argument that ebooks should somehow cost even more than physical books, and that it's "puzzling" how much attention people pay to price. It's hardly surprising that consumers would respond to what they see as unfair pricing models in whatever method is available to them. When the easiest and most available method of feedback is through a star rating system, naturally people will use that for anything they feel the need to say, even if that's about the price rather than the content of the book. Rather than moaning about people's desire to see a discount when they're getting a product that's cheaper to produce, Ariely should consider solutions to the issue he raises. If you don't like people talking about the "wrong" thing in a review, perhaps the answer is to make it easier for them to talk about those things somewhere else. How about a "why I'm not buying this" box? As a onetime publisher myself, I would have loved to know WHY people didn't buy, not just the fact that they didn't.
- jsdalton 16y ago
  His argument is that e-books have greater utility than hardcover books. In general, consumers are willing to pay more for products that are more useful to them. How is that so hard to understand? He's an economist. This is a thought exercise that illustrates an apparent paradox in pricing. It's actually an extremely interesting insight for entrepreneurs (and others) who would like to set the most effective price for their product.
  - urbanjunkie 16y ago
    What's the insight? It may make sense from the economic rational-actor perspective, but the real world is a lot more complex than that. We're not (all) rational robots performing relatively complex math to determine our tolerable enjoyment-utility per hour thresholds.
  - jaysonelliot 16y ago
    There's no paradox in expecting cost savings to be reflected in retail pricing. The idea that an ebook has more utility than a real book is hardly uncontroversial. You can't read it without the appropriate technology and a power source, it can't be easily lent to another person, can't be resold, and lacks all of the physical qualities that make a well-designed book readable, such as paper quality and typography. The advantages of ebooks are that they are easier to carry, can be purchased instantly without a trip to the store, and are never out of stock. It's the convenience of ordering that has made them popular, but customers aren't idiots. They know that printing, binding, shipping and storing books is expensive, and that those costs are reflected in the price. When you remove all of those elements, they expect the price to go down as well. How is that so hard to understand?
    - jsdalton 16y ago
      But you just re-stated the entire article -- that, despite the obvious increase in utility afforded by e-books, customers are not blind to producer prices and expect (nay, demand) fairness in pricing. Yes, this is common sense. But it is "paradoxical" (or lets' just say, confounding) from the perspective of traditional economics -- i.e., it is hard to construct a model which accounts for this behavior if you consider consumers as rational actors. The behavioral economics movement -- of which the author of this article is a member -- came about to highlight the ways that human behavior is not "rational" in the traditional economics sense, and concepts such as perceived fairness or context have a huge impact. As an aside, I didn't really read his last paragraph until just now, and thus I didn't really understand the undercurrent of anger in the comments here. I do agree that it's a foolish conclusion he makes (I'd summarize it as "bend over") and the whole point I walked away with from his previous discussion was that producers cannot expect to set prices based solely on utility; they must take into consideration perceptions of fairness and producer costs.
      - gloob 16y ago
        I believe I'm in violent agreement with your second paragraph. A mismatch between the predictions of an economic theory and what happens in the real world demonstrates a predictive (and therefore descriptive) inadequacy of that theory, rather than a (moral) failure of the world.
  - igorlev 16y ago
    The idea that information, such as ebooks, should be priced based on consumer utility rather then marginal cost is something that is a naturally attractive viewpoint for the seller but not necessarily for the buyer. When you have a relatively high initial sunk cost and a relatively low marginal production/distribution cost, a lot of sellers will be trying to work very hard to push value based pricing since the alternative, of a small profit over marginal cost, scares a lot of them since the marginal cost is 0. I think that consumer acceptance of this is based on a sense of fairness combined with knowledge of the sellers cost. A lot people have no problem paying 10c for a text message, because the amount is tiny and few know that the marginal cost for the carrier is practically 0. The lack of knowledge as well as the low price (even lower for bundled plans) makes it just easier to pay rather then protest. For ebooks a significant amount of people might have an intuitive (though possibly flawed) understanding of the marginal cost and have a reason to spend time protesting, because the amounts are significantly higher then 10c. As with any such technology driven changes in the past, I think in the long run the price will still trend more towards the marginal cost, ie 0, in the long run. Given enough time, I think that publishers and authors will realize that given the ease of distribution for ebooks they can maintain or even increase their profits by lowering unit costs and making it up on volume. This will happen whether the producers want it or not, as they will be forced to lower prices by rampant piracy. P.S. I have to give credit for a lot of the above ideas to a great book, Information Rules, that has been around for 10 years or so.
  - bluekeybox 16y ago
    There is utility, and then there is liquidity. Believe it or not, digital copies are less liquid than hardcopies because they cannot be resold. I own many specialist technical books in the $70-90 price range as well as art books in the $100-150 range which I would never even thought about purchasing if I knew they could not be resold. I suppose many consumers think this way as well.
    - jaysonelliot 16y ago
      Liquidity is a very good point. I'd also include another issue which I don't have a word for, because economics is not my field. That's the issue of permanence and authenticity, the value of knowing that the object you are looking at is in fact the same as it was when originally created, and not a reproduction or altered version. I collect first editions and other vintage copies of magazines I admire. Among my collection is a Vanity Fair from 1935 containing the obituary of Lawrence of Arabia, a story on the new Bay Bridge in SF, the "Brown Bomber" Joe Louis, and pleas for peace in Europe. I would not pay anything for a PDF of this magazine. As a physical artifact, it was worth the $30 I paid for it. There is utility and value in physicality that cannot be found in digital ephemera.
  - kscaldef 16y ago
    Generally speaking, a Subaru has greater utility than a Ferrari, but no one complains that the Ferrari ought to be less expensive on that basis. That said, I think it's an incorrect assertion that an e-book (with DRM) has greater utility than a physical book.
    - eru 16y ago
      A Ferrari might get you laid. That's enough utility for some people.
- nazgulnarsil 16y ago
  part of the argument hinges on how fungible you (and consumers in general) perceive informational goods.
- madcaptenor 16y ago
  Another weird use of the star rating system: a lot of textbooks seem to get one-star reviews from people who really don't have a problem with the book but didn't like the instructor of the course they used it in.
- siglesias 16y ago
  Should the boxed version of Photoshop cost more than the digital download because the boxed version comes with higher marginal costs? What if additionally we made the assumption (which Ariely is making here) that the digital download version came with more features and conveniences? I think that our intuition (especially from the software maker's standpoint) is that they could at least charge the same for both. According to classical economics, the manufacturer's costs should not have anything at all to do with deciding how much to pay for something. It's simply, "how much do I enjoy this?" Of course as we see consumers don't behave this way.
  - jaysonelliot 16y ago
    For Photoshop, the box is just a way of getting the product to you. For a book, the physical object may be as much a part of the product as the information contained within. It's not an apples-to-apples comparison.
    - siglesias 16y ago
      To quote a reviewer: "We should not let the publishers hold us hostage because we prefer to read the electronic format.” I think you're missing the principle matter: people are complaining that ebooks shouldn't cost as much as physical books because they cost less to produce. Nobody is saying they prefer physical books because they are physical objects, and nobody seems to be treating them like anything other than the same thing delivered in different ways at different costs. Find me evidence please that this whole thing isn't driven by the perception of fairness in what the product costs to produce. Edit: Vote me down all you want, but lack of evidence is still lack of evidence. I guess when emotions run high people lose the need to make rational points and just downvote. Give me some justification. Argue with me.
      - jaysonelliot 16y ago
        Quick point of etiquette - not only would I not downvote based on disagreement, it's actually IMPOSSIBLE to do so when the comment in question is in reply to one's own comment. It's a HN feature to avoid the downvote becoming a kneejerk response to back-and-forth discussions. You use one reviewer's statement that that person prefers an ebook. There's no further explanation as to why (s)he prefers that format, and no data behind it - just a single comment. I expect that the primary issue is, in fact, what you say - fairness over cost of production. That does not logically lead to your assertion that the two are "same thing delivered in different ways."
hsmyers 16y ago
Absolute, complete utter bullshit. Functionality be damned--- such a pricing structure makes it impossible for people to get beyond the initial rip-off. Nor should they; this is the same approach that gave us 20.00 CDs with a single desired track, year after year after year. The single star review is the equivalent of the pitchfork and torch, perhaps it is time the publishers looked out the castle window!
- jerrya 16y ago
  Yes, I think you're absolutely right. What the publisher is doing, and Ariely agreeing with is known as Value Pricing: http://en.wikipedia.org/wiki/Value-based_pricing http://en.wikipedia.org/wiki/Value-based_pricing. It's a great way to make sure you optimize your short term profits. And yes, your customer feels ripped off by it as prices as well they should as you have just siphoned off their economic value. Bye bye customer relationship!
sid0 16y ago
I'm not sure what Dan's point is. Customers know that digital versions cost publishers much less money. Pricing them higher is obviously going to make users feel disrespected and think "greed indeed", as a review stated. And maybe it's because Dan and I are using different definitions of rationality, but I also don't see how the 1-star reviews are irrational. I think fairness is a big part of rationality, and the thought that "as readers we should pay a little less attention to minor differences in price" is shockingly short-sighted. Behind the 1-star reviews is a deep-seated and completely rational worry that if the higher pricing works, in the long term, sellers will be encouraged to bump prices up even more. Edit: There are comments to the blog post about how the pricing makes sense from a "traditional economics" viewpoint. I don't know much about it, but if traditional economics doesn't take humanness (respect, fairness) into account then it's just a failure on the subject's part.
- pixcavator 16y ago
  >>...humanness (respect, fairness)... “Cheapness” is the word you are looking for.
latch 16y ago
The most annoying thing is that Kindle books often have mistakes because of misses in the conversion (OCR). I don't think I have a single Kindle book that doesn't have at least a 3-4 typos (1's for I)...and there's always one that tends to really throw me off for a second. It really annoys me to pay more and have additional mistakes in my book.
smackay 16y ago
The article makes two contradictory points. First that the standard view that the utility of a product should determine the price is confounded by real-world human factors and second that consumers should ignore real-world human factors and accept prices based on utility. Seems to me that since economics attempts to model the transactions and interactions of humans engaged in various types of commerce that trying to change the subject being studied so the models work better is a little misguided.
jrockway 16y ago
It is strange. The part of a book that costs money is paying someone to come up with and type in the words. Printing it is cheap. Sending you an e-book is cheap. Those cost nothing compared to the labor that goes into making a good book. Therefore, to me, it makes sense that a book would be $15 regardless of whether I get a dead tree in the mail or not. (This assumes that there is no DRM on the e-book. If I can't lend the book or share it with friends, then the e-book is not as good as the real book.)
- jaysonelliot 16y ago
  Your basic facts are wrong. The cost of author royalties is about 15% of the total retail price. Here's a good breakdown for you. http://journal.bookfinder.com/2009/03/breakdown-of-book-costs.html http://journal.bookfinder.com/2009/03/breakdown-of-book-cost... Based on a list price of $27.95: $3.55 - Pre-production $2.83 - Printing $2.00 - Marketing $2.80 - Wholesaler $4.19 - Author Royalties $12.58 - Profit Some costs other than printing also go away with ebooks. Pre-production becomes cheaper because the design and typography are typically discarded. Marketing gets cheaper when there are no books to mail or galleys to pre-produce for reviewers. Wholesale costs are gone, because distribution is streamlined to go directly from the publisher to Amazon, Apple, or whomever. An $28 hardcover, sold exclusively as an ebook, could quite comfortably be sold for $15-$20 and still cover all the author, production, and marketing costs without losing any profit for the publisher. When sold in conjunction with a hardback, as most ebooks are, the price can go even lower. Just as with paperbacks, the sunk costs are borne by the hardback. This is why a $28 hardcover becomes a $14 paperback - and why it could easily be a $10 ebook.
  - jrockway 16y ago
    The "profit" section exists because there's a middleman, but let's forget about that for the sake of this argument. The cost of the stack of glued-together pages costs $3. Everything else pays for the production of the book in some way. Charging the same for the e-book, which needs marketing, copyediting, graphics design, etc., etc., just like the dead-tree book, means the author (or someone) gets $3 more. In this way, it doesn't seem particularly evil to not give the end-user that $3 discount. Just give the author $3 more. (As an author, the last thing I want is an App-Store-style race to the bottom. I want more than $0.30 per copy of book I sell, paper or otherwise.)

18 points by siglesias 16y ago

Dan Ariely makes a baffling argument that ebooks should somehow cost even more than physical books, and that it's "puzzling" how much attention people pay to price. It's hardly surprising that consumers would respond to what they see as unfair pricing models in whatever method is available to them. When the easiest and most available method of feedback is through a star rating system, naturally people will use that for anything they feel the need to say, even if that's about the price rather than the content of the book. Rather than moaning about people's desire to see a discount when they're getting a product that's cheaper to produce, Ariely should consider solutions to the issue he raises. If you don't like people talking about the "wrong" thing in a review, perhaps the answer is to make it easier for them to talk about those things somewhere else. How about a "why I'm not buying this" box? As a onetime publisher myself, I would have loved to know WHY people didn't buy, not just the fact that they didn't.

jsdalton 16y ago
His argument is that e-books have greater utility than hardcover books. In general, consumers are willing to pay more for products that are more useful to them. How is that so hard to understand? He's an economist. This is a thought exercise that illustrates an apparent paradox in pricing. It's actually an extremely interesting insight for entrepreneurs (and others) who would like to set the most effective price for their product.
- urbanjunkie 16y ago
  What's the insight? It may make sense from the economic rational-actor perspective, but the real world is a lot more complex than that. We're not (all) rational robots performing relatively complex math to determine our tolerable enjoyment-utility per hour thresholds.
- jaysonelliot 16y ago
  There's no paradox in expecting cost savings to be reflected in retail pricing. The idea that an ebook has more utility than a real book is hardly uncontroversial. You can't read it without the appropriate technology and a power source, it can't be easily lent to another person, can't be resold, and lacks all of the physical qualities that make a well-designed book readable, such as paper quality and typography. The advantages of ebooks are that they are easier to carry, can be purchased instantly without a trip to the store, and are never out of stock. It's the convenience of ordering that has made them popular, but customers aren't idiots. They know that printing, binding, shipping and storing books is expensive, and that those costs are reflected in the price. When you remove all of those elements, they expect the price to go down as well. How is that so hard to understand?
  - jsdalton 16y ago
    But you just re-stated the entire article -- that, despite the obvious increase in utility afforded by e-books, customers are not blind to producer prices and expect (nay, demand) fairness in pricing. Yes, this is common sense. But it is "paradoxical" (or lets' just say, confounding) from the perspective of traditional economics -- i.e., it is hard to construct a model which accounts for this behavior if you consider consumers as rational actors. The behavioral economics movement -- of which the author of this article is a member -- came about to highlight the ways that human behavior is not "rational" in the traditional economics sense, and concepts such as perceived fairness or context have a huge impact. As an aside, I didn't really read his last paragraph until just now, and thus I didn't really understand the undercurrent of anger in the comments here. I do agree that it's a foolish conclusion he makes (I'd summarize it as "bend over") and the whole point I walked away with from his previous discussion was that producers cannot expect to set prices based solely on utility; they must take into consideration perceptions of fairness and producer costs.
    - gloob 16y ago
      I believe I'm in violent agreement with your second paragraph. A mismatch between the predictions of an economic theory and what happens in the real world demonstrates a predictive (and therefore descriptive) inadequacy of that theory, rather than a (moral) failure of the world.
- igorlev 16y ago
  The idea that information, such as ebooks, should be priced based on consumer utility rather then marginal cost is something that is a naturally attractive viewpoint for the seller but not necessarily for the buyer. When you have a relatively high initial sunk cost and a relatively low marginal production/distribution cost, a lot of sellers will be trying to work very hard to push value based pricing since the alternative, of a small profit over marginal cost, scares a lot of them since the marginal cost is 0. I think that consumer acceptance of this is based on a sense of fairness combined with knowledge of the sellers cost. A lot people have no problem paying 10c for a text message, because the amount is tiny and few know that the marginal cost for the carrier is practically 0. The lack of knowledge as well as the low price (even lower for bundled plans) makes it just easier to pay rather then protest. For ebooks a significant amount of people might have an intuitive (though possibly flawed) understanding of the marginal cost and have a reason to spend time protesting, because the amounts are significantly higher then 10c. As with any such technology driven changes in the past, I think in the long run the price will still trend more towards the marginal cost, ie 0, in the long run. Given enough time, I think that publishers and authors will realize that given the ease of distribution for ebooks they can maintain or even increase their profits by lowering unit costs and making it up on volume. This will happen whether the producers want it or not, as they will be forced to lower prices by rampant piracy. P.S. I have to give credit for a lot of the above ideas to a great book, Information Rules, that has been around for 10 years or so.
- bluekeybox 16y ago
  There is utility, and then there is liquidity. Believe it or not, digital copies are less liquid than hardcopies because they cannot be resold. I own many specialist technical books in the $70-90 price range as well as art books in the $100-150 range which I would never even thought about purchasing if I knew they could not be resold. I suppose many consumers think this way as well.
  - jaysonelliot 16y ago
    Liquidity is a very good point. I'd also include another issue which I don't have a word for, because economics is not my field. That's the issue of permanence and authenticity, the value of knowing that the object you are looking at is in fact the same as it was when originally created, and not a reproduction or altered version. I collect first editions and other vintage copies of magazines I admire. Among my collection is a Vanity Fair from 1935 containing the obituary of Lawrence of Arabia, a story on the new Bay Bridge in SF, the "Brown Bomber" Joe Louis, and pleas for peace in Europe. I would not pay anything for a PDF of this magazine. As a physical artifact, it was worth the $30 I paid for it. There is utility and value in physicality that cannot be found in digital ephemera.
- kscaldef 16y ago
  Generally speaking, a Subaru has greater utility than a Ferrari, but no one complains that the Ferrari ought to be less expensive on that basis. That said, I think it's an incorrect assertion that an e-book (with DRM) has greater utility than a physical book.
  - eru 16y ago
    A Ferrari might get you laid. That's enough utility for some people.
nazgulnarsil 16y ago
part of the argument hinges on how fungible you (and consumers in general) perceive informational goods.
madcaptenor 16y ago
Another weird use of the star rating system: a lot of textbooks seem to get one-star reviews from people who really don't have a problem with the book but didn't like the instructor of the course they used it in.
siglesias 16y ago
Should the boxed version of Photoshop cost more than the digital download because the boxed version comes with higher marginal costs? What if additionally we made the assumption (which Ariely is making here) that the digital download version came with more features and conveniences? I think that our intuition (especially from the software maker's standpoint) is that they could at least charge the same for both. According to classical economics, the manufacturer's costs should not have anything at all to do with deciding how much to pay for something. It's simply, "how much do I enjoy this?" Of course as we see consumers don't behave this way.
- jaysonelliot 16y ago
  For Photoshop, the box is just a way of getting the product to you. For a book, the physical object may be as much a part of the product as the information contained within. It's not an apples-to-apples comparison.
  - siglesias 16y ago
    To quote a reviewer: "We should not let the publishers hold us hostage because we prefer to read the electronic format.” I think you're missing the principle matter: people are complaining that ebooks shouldn't cost as much as physical books because they cost less to produce. Nobody is saying they prefer physical books because they are physical objects, and nobody seems to be treating them like anything other than the same thing delivered in different ways at different costs. Find me evidence please that this whole thing isn't driven by the perception of fairness in what the product costs to produce. Edit: Vote me down all you want, but lack of evidence is still lack of evidence. I guess when emotions run high people lose the need to make rational points and just downvote. Give me some justification. Argue with me.
    - jaysonelliot 16y ago
      Quick point of etiquette - not only would I not downvote based on disagreement, it's actually IMPOSSIBLE to do so when the comment in question is in reply to one's own comment. It's a HN feature to avoid the downvote becoming a kneejerk response to back-and-forth discussions. You use one reviewer's statement that that person prefers an ebook. There's no further explanation as to why (s)he prefers that format, and no data behind it - just a single comment. I expect that the primary issue is, in fact, what you say - fairness over cost of production. That does not logically lead to your assertion that the two are "same thing delivered in different ways."

hsmyers 16y ago

Absolute, complete utter bullshit. Functionality be damned--- such a pricing structure makes it impossible for people to get beyond the initial rip-off. Nor should they; this is the same approach that gave us 20.00 CDs with a single desired track, year after year after year. The single star review is the equivalent of the pitchfork and torch, perhaps it is time the publishers looked out the castle window!

jerrya 16y ago
Yes, I think you're absolutely right. What the publisher is doing, and Ariely agreeing with is known as Value Pricing: http://en.wikipedia.org/wiki/Value-based_pricing http://en.wikipedia.org/wiki/Value-based_pricing. It's a great way to make sure you optimize your short term profits. And yes, your customer feels ripped off by it as prices as well they should as you have just siphoned off their economic value. Bye bye customer relationship!

sid0 16y ago

I'm not sure what Dan's point is. Customers know that digital versions cost publishers much less money. Pricing them higher is obviously going to make users feel disrespected and think "greed indeed", as a review stated. And maybe it's because Dan and I are using different definitions of rationality, but I also don't see how the 1-star reviews are irrational. I think fairness is a big part of rationality, and the thought that "as readers we should pay a little less attention to minor differences in price" is shockingly short-sighted. Behind the 1-star reviews is a deep-seated and completely rational worry that if the higher pricing works, in the long term, sellers will be encouraged to bump prices up even more. Edit: There are comments to the blog post about how the pricing makes sense from a "traditional economics" viewpoint. I don't know much about it, but if traditional economics doesn't take humanness (respect, fairness) into account then it's just a failure on the subject's part.

pixcavator 16y ago
>>...humanness (respect, fairness)... “Cheapness” is the word you are looking for.

latch 16y ago

The most annoying thing is that Kindle books often have mistakes because of misses in the conversion (OCR). I don't think I have a single Kindle book that doesn't have at least a 3-4 typos (1's for I)...and there's always one that tends to really throw me off for a second. It really annoys me to pay more and have additional mistakes in my book.

smackay 16y ago

The article makes two contradictory points. First that the standard view that the utility of a product should determine the price is confounded by real-world human factors and second that consumers should ignore real-world human factors and accept prices based on utility. Seems to me that since economics attempts to model the transactions and interactions of humans engaged in various types of commerce that trying to change the subject being studied so the models work better is a little misguided.

jrockway 16y ago

It is strange. The part of a book that costs money is paying someone to come up with and type in the words. Printing it is cheap. Sending you an e-book is cheap. Those cost nothing compared to the labor that goes into making a good book. Therefore, to me, it makes sense that a book would be $15 regardless of whether I get a dead tree in the mail or not. (This assumes that there is no DRM on the e-book. If I can't lend the book or share it with friends, then the e-book is not as good as the real book.)

jaysonelliot 16y ago
Your basic facts are wrong. The cost of author royalties is about 15% of the total retail price. Here's a good breakdown for you. http://journal.bookfinder.com/2009/03/breakdown-of-book-costs.html http://journal.bookfinder.com/2009/03/breakdown-of-book-cost... Based on a list price of $27.95: $3.55 - Pre-production $2.83 - Printing $2.00 - Marketing $2.80 - Wholesaler $4.19 - Author Royalties $12.58 - Profit Some costs other than printing also go away with ebooks. Pre-production becomes cheaper because the design and typography are typically discarded. Marketing gets cheaper when there are no books to mail or galleys to pre-produce for reviewers. Wholesale costs are gone, because distribution is streamlined to go directly from the publisher to Amazon, Apple, or whomever. An $28 hardcover, sold exclusively as an ebook, could quite comfortably be sold for $15-$20 and still cover all the author, production, and marketing costs without losing any profit for the publisher. When sold in conjunction with a hardback, as most ebooks are, the price can go even lower. Just as with paperbacks, the sunk costs are borne by the hardback. This is why a $28 hardcover becomes a $14 paperback - and why it could easily be a $10 ebook.
- jrockway 16y ago
  The "profit" section exists because there's a middleman, but let's forget about that for the sake of this argument. The cost of the stack of glued-together pages costs $3. Everything else pays for the production of the book in some way. Charging the same for the e-book, which needs marketing, copyediting, graphics design, etc., etc., just like the dead-tree book, means the author (or someone) gets $3 more. In this way, it doesn't seem particularly evil to not give the end-user that $3 discount. Just give the author $3 more. (As an author, the last thing I want is an App-Store-style race to the bottom. I want more than $0.30 per copy of book I sell, paper or otherwise.)