Managerial Economics
MBA 540
Chapter 7 Case
Analyzing Managerial Decisions: iTunes Music Pricing

1. Provide an argument for why a variable pricing policy might increase the sales revenue from Apple’s Music Store.
The music industry is big business and for many years, consumers have obtained music in many ways other than purchases, which is known as piracy. Today, consumers can purchase music through file-swapping networks, thus leading to a decline in the music industry’s total revenue. In 2003, after agreement with individual music companies, Apple Inc. gave customers the opportunity to purchase and download digital music and audio books through Apple’s iTunes Music Store awaiting at least some revenue from downloaded music (Brickley, Smith, & Zimmerman, 2009). At that time, Apple’s managerial staff set the product price at $.99 per song for all digital music. In 2005, the Music Store sales soared, thus encouraging record companies to ask for a more variable pricing policy. The record companies requested the price for popular songs to increase in price and the older songs to drop in price (Brickley, Smith, & Zimmerman, 2009). In 2009, after negotiations between Apple and the record companies, Phil Schiller, Apple’s senior vice president, announced Apple’s iTunes store would offer music at three prices - $.69, $.99 and $1.29 (Breen, 2009). The variable pricing policy went in effect April 2009 at Apple’s iTunes Music Store (Breen, 2009) and not long after, almost all top songs went from $.99 to $1.29. It was unclear how the price change would affect music sales; however, a study by Billboard of Nilesen SoundScan reported the variable pricing policy was successful (unknown, 2009). Nilesen SoundScan reported that most tracks that saw an increase in price dropped in sales- the entire album stayed the same; however, the $.30 difference in price