Amazon had a public dispute with the book publisher Hachette regarding its prices for e-books. Amazon...

Amazon had a public dispute with the book publisher Hachette regarding its prices for e-books. Amazon was trying convince Hachette to lower their price for e-books, arguing that doing so would benefit both consumers and the publisher; Hachette was refusing to cut their prices, countering that lower prices would hurt both the publisher and their authors. Amazon explained their objectives in terms of price elasticity on their discussion board which they recently discontinued. The full post was e-mailed to the class and is posted on Blackboard.

a.) Amazon states that "For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99." Use this information to calculate the price elasticity of demand for e-books between these two prices. Show your work.

b.) Suppose Amazon was selling 7,000,000 Hachette e-books when the price was $14.99. If their above calculations are correct, how many would they sell after the price is cut to $9.99? What would the total revenue from e-books equal before and after the price cut?

c.) Amazon claims that “e-books are highly price elastic.” If this is the case, then why wouldn't Amazon want to cut prices even further? For example, why not cut the price of e-books to $0.99 instead of $9.99?

Expert Solution

a) 1 copy of e-book at $14.99, 1.74 copies would be sold at $9.99. Price elasticity of demand is the percentage change in quantity demanded divided by percentage change in price. Thus (1.74/1)-1 *100 = 74%. Percentage change in price (9.99/14.99)-1 *100 = 33%. Thus quantity demanded rises 74%, when price falls 33%. Thus price elasticity of demand is 74/33 =2.24. Thus demand for the good is highly affected by the price.

b) 7,000,000 books at price $14.99, after the price cut at $9.99. The price elasticity is 2.24. Thus as the price declines by 33%, demand would go up by 74%, thus 7,000,000 (1.74) = 12,180,000 would be sold. Total revenue from e-books before the price cut is 7,000,000*$14.99 = $104,930,000. After the price cut, the total revenue is $121,678,200.

c) If amazon cuts the price to $0.99, it will be a (0.99/9.99)-1 *100 = 90% cut, which is very high, the demand also has to correspond to that much price decline. Plus if Amazon cuts the price to such an extent, there would no incentive for the authors and the website to operate in such a business as there would hardly be any revenue. Amazon is already having a hard time convincing Hachette to sell the e-books at a lower price, then it would have a severe task in convincing all the publishers as no one would agree.

Rahul Sunny answered 2 years ago

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