7 ms·

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 pr

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.
    - jaysonelliot 16y ago
      Sorry, but you insist on phrases like "obvious increase in utility" when that is not at all the case, as I just pointed out. I could just as easily talk about the "obvious increase in utility afforded by real physical books." This isn't even a case of rational or irrational behavior. It's a case of an economist misunderstanding the real value of a product to consumers. Just because people buy ebooks doesn't mean they view them as having greater utility than real books. Does a movie from iTunes have greater utility than a DVD? An MP3 versus a vinyl record with beautiful sleeve art, gatefolds, and liner notes? Is an iPad "magazine" more valuable than a physical one? Digital simulacrum of real-world objects are popular because they can be purchased on a whim, and produce instant gratification. That doesn't make them inherently superior. One author friend of mine, Margaret Weis, has seen ebook sales outpace her physical book sales this year. At the same time, her physical book sales have not suffered at all. What has happened is that people have been buying ebooks for instant gratification, then going back and purchasing the real thing later. That would seem to speak directly against your opinion that ebooks have an "obvious increase in utility."
- 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."

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.
  - jaysonelliot 16y ago
    Sorry, but you insist on phrases like "obvious increase in utility" when that is not at all the case, as I just pointed out. I could just as easily talk about the "obvious increase in utility afforded by real physical books." This isn't even a case of rational or irrational behavior. It's a case of an economist misunderstanding the real value of a product to consumers. Just because people buy ebooks doesn't mean they view them as having greater utility than real books. Does a movie from iTunes have greater utility than a DVD? An MP3 versus a vinyl record with beautiful sleeve art, gatefolds, and liner notes? Is an iPad "magazine" more valuable than a physical one? Digital simulacrum of real-world objects are popular because they can be purchased on a whim, and produce instant gratification. That doesn't make them inherently superior. One author friend of mine, Margaret Weis, has seen ebook sales outpace her physical book sales this year. At the same time, her physical book sales have not suffered at all. What has happened is that people have been buying ebooks for instant gratification, then going back and purchasing the real thing later. That would seem to speak directly against your opinion that ebooks have an "obvious increase in utility."
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."