Over at The Atlantic Business Channel, Daniel Indiviglio tells Virginia Postrel that just because marginal costs of producing e-books is close to zero does not mean that the price should be close to zero. He correctly points out that price only equals marginal cost when markets are perfectly competitive, and the book market is not perfectly competitive. But Postrel didn’t claim price should equal marginal cost, which you can see in her discussion of the importance of demand:

The other side of the equation is consumer response: How many more copies will people buy if the price goes down? Or, in economic lingo, what is the price elasticity of demand?

Her point is that since price elasticity is large the price should be closer to the marginal cost, because you sell a lot more books by lowering the price. What Inviglio seems to miss is that if Postrel thought that the market were perfectly competitive, she wouldn’t be discussing the price elasticity of demand, since in perfectly competitive markets producers are price takers, i.e. the price is set by the market, which means that from the book sellers perspective the price elasticity of demand would in fact be infinite.

Inviglio’s point about price not being equal to marginal cost is an important one to remember though. Even if books could be made at a no cost, the authors would write them for the publishers for free, and there were no uncertainty about which books would be popular,  the price of books would not equal zero.

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