Have you ever used a buying model like Half.com’s Match My Price? For those who the name doesn’t ring a bell, the basic idea is that you name a strike price at which you commit to buy the item if anyone chooses to sell it to you at that price. It’s rather like an eBay auction, minus the auctioning bit, plus the bit where it is the buyer who names the price and waits for sellers to approach rather than the reverse.
I bring this up because I’m rather curious as to why no publishers sell their e-books in this way. The marginal cost to “producing” and selling one more e-books is close to zero, and if cleverly implemented, such a scheme can bring publishers and/or authors revenues that they would not have earned otherwise. Some cleverness is needed because content providers, indeed any sellers of products, would not want to sell to a person with a strike price of, say, $3.99 if that somebody would’ve been willing to buy the book at $12.99. Cannibalization of higher-margin sales & all & all.
However, it’s not impossible to separate out buyers who have high willingness to pay from buyers who will only buy at the cheaper prices (i.e, me!). One can do this by making the products sold to buyers with low willingness to pay a slightly inferior product by, for instance, deciding to either accept or reject their bids only once a month. Thus a person who wants a book for cheap has to wait a month and face the uncertainty that his strike price is too low, will be rejected, and he will not get the book. This is just carrying the price discrimination strategy that publishers already use to sell hardbacks versus softcovers a bit further.
So why not do it? Perhaps the administrative costs are high. Keeping track of what each person’s strike price is, implementing some sort of rule to decide whether to sell to him at that price, charging him exactly his bid, and thinking of clever techniques to keep high-paying customers from slipping into this poor man’s pool may suck up a good deal from money that would be made from these sales. Nonetheless, there are ways around this. For example, one can limit the strike prices that potential buyers can put in, e.g. whole number dollars only. Although this is contrary to the purpose of this type of business model — to get people who would not have bought one’s book at a high price to name a price at which they would be willing to buy — one can put a low floor on what bids one is willing to accept to make sure that the cost of processing the transaction is covered. (Alternatively, one can just reject those bids, the equivalent of having hidden floors on eBay.)
If Amazon can have profitable dynamic pricing programs, then why can’t a scheme like this be similarly profitable? Moreover, this scheme has the added advantage that it avoids the backlash created by retailers selling the same goods at different prices to people because those prices are named by the buyers in the first place.