May 22, 2012

Arguing about “marginal cost”


In an article on the Columbia Journalism Review website Ryan Chittum takes on a spate of recent tech posts “arguing that production costs (you know, minor details like advances, editors, etc.) don’t or shouldn’t factor into the end price” of an ebook. He wags his finger at author Chuck Windig, GigaOm’s Mathew Ingram, and TechDirt’s Mike Masnick, who have all recently made a variation of the argument.

It’s all wrong, according to Chittum because:

an ebook’s production cost is directly related to the decision to make it at all. Just as buyers may decide that a $12.99 ebook is too dear, sellers may decide that any price below that level doesn’t justify the cost of writing, editing, and publishing it.

If demand were all that mattered—reader heaven—ebooks would cost 99 cents and you could impulse-buy them like an iTunes song. In book-business heaven, ebooks could charge some big number, and readers would have no choice but to pay up.

In reality, as in theory, the market for books is only so big—we only have so much time—so a 99-cent price point might move a lot of units but not enough to justify the cost of production. Obviously, a $50 price point would crush sales and also bring in much less revenue overall.

Chittum further argues that there is a widespread misunderstanding of the economics of “marginal cost” in the media business:

Marginal costs in the ebooks industry aren’t even really about what it costs to produce a copy. In ebooks and other digital media they’re actually about what it costs to produce the next entirely new ebook, not what it costs to send out one more copy of Harry Potter. The marginal cost to an airline, for example, of putting one more person on a plane is almost nothing, but it would go broke (or broker) if it did that. The real marginal cost is what it takes to get the next plane in the air, not the next passenger.


Kelly Burdick is the executive editor of Melville House.