Magnatune - Variable Pricing for Music

Magnatune - Variable Pricing for Music

Regner, Tobias and Barria, Javier A., "Magnatune - Variable Pricing for Music" (March 2005).

Abstract:

The paper analyzes the behavior of customers of the online music label Magnatune. They are allowed to pay what they want for music albums, as long as the payment is within a given price range ($5-$18).

We develop a model that is based on reciprocal theories of social preferences pioneered by Rabin (1993) and extended by Dufwenberg and Kirchsteiger (2004). We study the relationship between artists/labels and customers and use a moral hazard model for our analysis. It takes social preferences into account and it also considers the importance of free sampling of experience goods. The predictions of our model are empirically tested with the field data we obtained.

Comprehensive pre-purchase access at Magnatune supports music discovery and sets it apart from conventional online music stores. We conclude that this open contracts design encourages people to make a voluntary payment. The results of our empirical analysis validate this, as the average payment is $8.20, far more than the minimum of $5 and even higher than the recommended price of $8.

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