Pot of Gold

24th November, 2007

Dear Economist
British rock band Radiohead have come up with a radical price model for their new album In Rainbows: it is available for digital download and customers decide the price themselves. Could you elaborate on the economic principles at play? I chose to pay £5 out of love for original and creative content, but I admit that my behaviour is absurd from any rational choice model.
Stig, Copenhagen

Dear Stig,

This is just an electronic tip jar, and people’s payments are governed by a desire to feel generous – or at least, to avoid looking stingy. That desire is enough to persuade almost everyone to tip at a restaurant, but what about online? Less so, it seems.

According to one internet consulting firm, almost two-thirds of those who downloaded the album paid nothing, and those who did pay didn’t pay much – less than £3 on average. That makes sense: much easier to leave no tip when you don’t have to look the waitress in the eye, and Radiohead make more than your waitress anyway.

If the figures are accurate, the band seems to have made £500,000 or less from downloads in just three weeks; their traditionally priced CDs probably made the band 10 times more, at least. But it is too early to say whether this scheme was profit-maximising, especially since Radiohead have criticised these estimates.

There is more to this than direct revenue, of course. The stunt also brought free press for a band widely thought to be past its prime. That trick will not work again, and future electronic tip jars seem likely to be emptier.

I can’t say whether your payment was rational. I strongly suspect that this business model, in the long term, is not.

First published at ft.com.

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