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What's the insight? It may make sense from the economic rational-actor perspective, but the real world is a lot more complex than that.

We're not (all) rational robots performing relatively complex math to determine our tolerable enjoyment-utility per hour thresholds.

There's no paradox in expecting cost savings to be reflected in retail pricing.

The idea that an ebook has more utility than a real book is hardly uncontroversial. You can't read it without the appropriate technology and a power source, it can't be easily lent to another person, can't be resold, and lacks all of the physical qualities that make a well-designed book readable, such as paper quality and typography.

The advantages of ebooks are that they are easier to carry, can be purchased instantly without a trip to the store, and are never out of stock.

It's the convenience of ordering that has made them popular, but customers aren't idiots. They know that printing, binding, shipping and storing books is expensive, and that those costs are reflected in the price. When you remove all of those elements, they expect the price to go down as well.

How is that so hard to understand?

But you just re-stated the entire article -- that, despite the obvious increase in utility afforded by e-books, customers are not blind to producer prices and expect (nay, demand) fairness in pricing.

Yes, this is common sense. But it is "paradoxical" (or lets' just say, confounding) from the perspective of traditional economics -- i.e., it is hard to construct a model which accounts for this behavior if you consider consumers as rational actors. The behavioral economics movement -- of which the author of this article is a member -- came about to highlight the ways that human behavior is not "rational" in the traditional economics sense, and concepts such as perceived fairness or context have a huge impact.

As an aside, I didn't really read his last paragraph until just now, and thus I didn't really understand the undercurrent of anger in the comments here. I do agree that it's a foolish conclusion he makes (I'd summarize it as "bend over") and the whole point I walked away with from his previous discussion was that producers cannot expect to set prices based solely on utility; they must take into consideration perceptions of fairness and producer costs.

I believe I'm in violent agreement with your second paragraph. A mismatch between the predictions of an economic theory and what happens in the real world demonstrates a predictive (and therefore descriptive) inadequacy of that theory, rather than a (moral) failure of the world.

Sorry, but you insist on phrases like "obvious increase in utility" when that is not at all the case, as I just pointed out.

I could just as easily talk about the "obvious increase in utility afforded by real physical books."

This isn't even a case of rational or irrational behavior. It's a case of an economist misunderstanding the real value of a product to consumers.

Just because people buy ebooks doesn't mean they view them as having greater utility than real books. Does a movie from iTunes have greater utility than a DVD? An MP3 versus a vinyl record with beautiful sleeve art, gatefolds, and liner notes? Is an iPad "magazine" more valuable than a physical one?

Digital simulacrum of real-world objects are popular because they can be purchased on a whim, and produce instant gratification. That doesn't make them inherently superior.

One author friend of mine, Margaret Weis, has seen ebook sales outpace her physical book sales this year. At the same time, her physical book sales have not suffered at all. What has happened is that people have been buying ebooks for instant gratification, then going back and purchasing the real thing later. That would seem to speak directly against your opinion that ebooks have an "obvious increase in utility."

You need to reexamine the Amazon customer comments that this article is based on. Nobody is saying that ebooks are less useful therefore they should cost less. If that were the case people would simply purchase the hardback copy and be done with it. This is simply outrage over the "fairness" of charging more for something that is cheaper to produce.

Here's my evidence:

Sunk cost fallacy: http://cl.ly/1V0Y2L3W2Y0l3A3S3F28 Fairness in cost fallacy: http://cl.ly/0i3u0V183e0g273l421e, http://cl.ly/3s1Z3l3w06291g0N0W15

Who is saying that the Kindle version is worse?

But it is "paradoxical" (or lets' just say, confounding) from the perspective of traditional economics -- i.e., it is hard to construct a model which accounts for this behavior if you consider consumers as rational actors.

Actually it's easy, and the last comment on the article nailed it. Ebook pricing is an iterated "ultimatum game": http://en.wikipedia.org/wiki/Ultimatum_game. A copy costs the publisher essentially nothing, creating a large amount of economic surplus to be divided between the seller and buyer. By setting the price higher than a physical book, the seller is attempting to capture almost all of the surplus, similar to keeping $99 and offering the other player $1 in the ultimatum game. In both cases if it's the only offer you're ever going to get, it's rational to take it because it's the best you can do. But in reality there will be future interactions with sellers. Refusing a slightly beneficial deal (and encouraging others to do so, in the case of reviews) will likely encourage them to offer more favorable deals in the future, producing a net benefit for buyers.

Thanks for that. It's good to see some rigour being brought to something that's hopefully intuitive (long-term gain).

The idea that information, such as ebooks, should be priced based on consumer utility rather then marginal cost is something that is a naturally attractive viewpoint for the seller but not necessarily for the buyer. When you have a relatively high initial sunk cost and a relatively low marginal production/distribution cost, a lot of sellers will be trying to work very hard to push value based pricing since the alternative, of a small profit over marginal cost, scares a lot of them since the marginal cost is 0.

I think that consumer acceptance of this is based on a sense of fairness combined with knowledge of the sellers cost. A lot people have no problem paying 10c for a text message, because the amount is tiny and few know that the marginal cost for the carrier is practically 0. The lack of knowledge as well as the low price (even lower for bundled plans) makes it just easier to pay rather then protest. For ebooks a significant amount of people might have an intuitive (though possibly flawed) understanding of the marginal cost and have a reason to spend time protesting, because the amounts are significantly higher then 10c.

As with any such technology driven changes in the past, I think in the long run the price will still trend more towards the marginal cost, ie 0, in the long run. Given enough time, I think that publishers and authors will realize that given the ease of distribution for ebooks they can maintain or even increase their profits by lowering unit costs and making it up on volume. This will happen whether the producers want it or not, as they will be forced to lower prices by rampant piracy.

P.S. I have to give credit for a lot of the above ideas to a great book, Information Rules, that has been around for 10 years or so.

There is utility, and then there is liquidity. Believe it or not, digital copies are less liquid than hardcopies because they cannot be resold.

I own many specialist technical books in the $70-90 price range as well as art books in the $100-150 range which I would never even thought about purchasing if I knew they could not be resold. I suppose many consumers think this way as well.

Liquidity is a very good point. I'd also include another issue which I don't have a word for, because economics is not my field.

That's the issue of permanence and authenticity, the value of knowing that the object you are looking at is in fact the same as it was when originally created, and not a reproduction or altered version.

I collect first editions and other vintage copies of magazines I admire. Among my collection is a Vanity Fair from 1935 containing the obituary of Lawrence of Arabia, a story on the new Bay Bridge in SF, the "Brown Bomber" Joe Louis, and pleas for peace in Europe. I would not pay anything for a PDF of this magazine. As a physical artifact, it was worth the $30 I paid for it. There is utility and value in physicality that cannot be found in digital ephemera.

Generally speaking, a Subaru has greater utility than a Ferrari, but no one complains that the Ferrari ought to be less expensive on that basis.

That said, I think it's an incorrect assertion that an e-book (with DRM) has greater utility than a physical book.

A Ferrari might get you laid. That's enough utility for some people.