A Primer on Cost

One of the common complaints about e-book readers is that the books are too expensive. These complaints usually bring up the fact that e-books should be much cheaper than physical books because you don’t have various costs such as printing, shipping, and storage to deal with. While those facts are true there is one economic fact that everybody seems to forget, cost of production has nothing to do with the sale price of a good:

Consumers set prices based on their preferences. It doesn’t matter what a book costs; what matters is what a reader will pay for it. Likewise, consumers in the Western world determine the prices — not by haggling — but by buying or not buying.

The fact is we set the cost of goods by buying or not buying them at asked prices. Hewlett-Packard’s TouchPad wasn’t selling at all when the price was set equal to the iPad but started selling like hotcakes when the price was reduces to $99.00. Obviously somewhere between the price of an iPad and $99.00 lies a price people are willing to pay for the device. Firearms are anther good that demonstrate the cost of production has nothing to do with the price people are willing to pay. Heckler and Koch make extremely expensive firearms that are functionally no more reliable than other similar firearms on the market yet people are willing to pay their higher asking price. Well I’m not willing to pay their price but that gets us into the fact that different people value different things:

There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production.… Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value.

Value is subjective and different from person to person. While I find the additional cost of an Apple computer acceptable for what they are many are not. I find the higher cost of certain beers well worth every penny while others who are fine with Budweiser value the cost of beer different.

While I would love to see e-book prices drop I know they won’t be doing so any time in the near future. The sale of e-books has exploded suggesting that people are fine with their cost often being similar to a hardcover or paperback version of the same title:

Book sales for all of last year rose 3.6 percent, from $11.25 billion in 2009 to $11.67 billion in 2010. But e-book sales rose a stunning 164.4 percent ($441.3 million vs. $166.9 million) and downloaded audiobook sales increased 38.8 percent, while physical audiobook sales decreased 6.3 percent.

A 164.4 percent increase in e-book sales would indicate that the price is currently set at a level acceptable to most consumers. When you complain that something is too expensive remember that you can vote with your wallet and simply not buy that product. If enough people follow you then the producer will have to reduce the price or face bankruptcy (unless the government bails them out). This ability to negotiate with your money is one of the greatest aspect of the free market. I only wish I could do the same with government services.