

The Rationality of One Star Reviews - siglesias
http://danariely.com/2011/04/10/the-rationality-of-one-star/

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jaysonelliot
Dan Ariely makes a baffling argument that ebooks should somehow cost even more
than physical books, and that it's "puzzling" how much attention people pay to
price.

It's hardly surprising that consumers would respond to what they see as unfair
pricing models in whatever method is available to them.

When the easiest and most available method of feedback is through a star
rating system, naturally people will use that for anything they feel the need
to say, even if that's about the price rather than the content of the book.

Rather than moaning about people's desire to see a discount when they're
getting a product that's cheaper to produce, Ariely should consider solutions
to the issue he raises.

If you don't like people talking about the "wrong" thing in a review, perhaps
the answer is to make it easier for them to talk about those things somewhere
else. How about a "why I'm not buying this" box? As a onetime publisher
myself, I would have loved to know WHY people didn't buy, not just the fact
that they didn't.

~~~
jsdalton
His argument is that e-books have greater utility than hardcover books. In
general, consumers are willing to pay more for products that are more useful
to them. How is that so hard to understand?

He's an economist. This is a thought exercise that illustrates an apparent
paradox in pricing. It's actually an extremely interesting insight for
entrepreneurs (and others) who would like to set the most effective price for
their product.

~~~
jaysonelliot
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?

~~~
jsdalton
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.

~~~
orangecat
_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.

~~~
sid0
Thanks for that. It's good to see some rigour being brought to something
that's hopefully intuitive (long-term gain).

------
hsmyers
Absolute, complete utter bullshit. Functionality be damned--- such a pricing
structure makes it impossible for people to get beyond the initial rip-off.
Nor should they; this is the same approach that gave us 20.00 CDs with a
single desired track, year after year after year. The single star review is
the equivalent of the pitchfork and torch, perhaps it is time the publishers
looked out the castle window!

~~~
jerrya
Yes, I think you're absolutely right. What the publisher is doing, and Ariely
agreeing with is known as Value Pricing: <http://en.wikipedia.org/wiki/Value-
based_pricing>.

It's a great way to make sure you optimize your short term profits. And yes,
your customer feels ripped off by it as prices as well they should as you have
just siphoned off their economic value.

Bye bye customer relationship!

------
latch
The most annoying thing is that Kindle books often have mistakes because of
misses in the conversion (OCR). I don't think I have a single Kindle book that
doesn't have at least a 3-4 typos (1's for I)...and there's always one that
tends to really throw me off for a second.

It really annoys me to pay more and have additional mistakes in my book.

------
smackay
The article makes two contradictory points. First that the standard view that
the utility of a product should determine the price is confounded by real-
world human factors and second that consumers should ignore real-world human
factors and accept prices based on utility. Seems to me that since economics
attempts to model the transactions and interactions of humans engaged in
various types of commerce that trying to change the subject being studied so
the models work better is a little misguided.

------
jrockway
It is strange. The part of a book that costs money is paying someone to come
up with and type in the words. Printing it is cheap. Sending you an e-book is
cheap. Those cost nothing compared to the labor that goes into making a good
book.

Therefore, to me, it makes sense that a book would be $15 regardless of
whether I get a dead tree in the mail or not. (This assumes that there is no
DRM on the e-book. If I can't lend the book or share it with friends, then the
e-book is not as good as the real book.)

~~~
jaysonelliot
Your basic facts are wrong. The cost of author royalties is about 15% of the
total retail price.

Here's a good breakdown for you.

[http://journal.bookfinder.com/2009/03/breakdown-of-book-
cost...](http://journal.bookfinder.com/2009/03/breakdown-of-book-costs.html)

Based on a list price of $27.95:

$3.55 - Pre-production

$2.83 - Printing

$2.00 - Marketing

$2.80 - Wholesaler

$4.19 - Author Royalties

$12.58 - Profit

Some costs other than printing also go away with ebooks. Pre-production
becomes cheaper because the design and typography are typically discarded.
Marketing gets cheaper when there are no books to mail or galleys to pre-
produce for reviewers. Wholesale costs are gone, because distribution is
streamlined to go directly from the publisher to Amazon, Apple, or whomever.

An $28 hardcover, sold exclusively as an ebook, could quite comfortably be
sold for $15-$20 and still cover all the author, production, and marketing
costs without losing any profit for the publisher.

When sold in conjunction with a hardback, as most ebooks are, the price can go
even lower. Just as with paperbacks, the sunk costs are borne by the hardback.
This is why a $28 hardcover becomes a $14 paperback - and why it could easily
be a $10 ebook.

~~~
jrockway
The "profit" section exists because there's a middleman, but let's forget
about that for the sake of this argument. The cost of the stack of glued-
together pages costs $3. Everything else pays for the production of the book
in some way.

Charging the same for the e-book, which needs marketing, copyediting, graphics
design, etc., etc., just like the dead-tree book, means the author (or
someone) gets $3 more. In this way, it doesn't seem particularly evil to not
give the end-user that $3 discount. Just give the author $3 more.

(As an author, the last thing I want is an App-Store-style race to the bottom.
I want more than $0.30 per copy of book I sell, paper or otherwise.)

~~~
jaysonelliot
Clearly, you didn't read what I wrote.

If you're going to debate an issue, at least do the courtesy of considering
the comment you're replying to.

~~~
jrockway
Clearly, you didn't read what I wrote.

If you're going to reply "Clearly, you didn't read what I wrote," at least do
the courtesy of considering the comment you're replying to.

~~~
jaysonelliot
After I broke down the costs very clearly, showing why there are more expenses
than just the printing which are saved with ebooks - and the real-world issue
of sunk costs which go into ebooks and paperbacks - you still insisted on
claiming that the only savings would be the printing costs.

The only thing you seem to have read was the numbers and the word profit.

What, exactly, do you think you said that wasn't considered?

~~~
jrockway
What I mean to say: OK, thanks for the breakdown. But the breakdown of current
costs don't necessarily mean they are going to stay that way forever.

The one thing that's constant is that the author needs to be compensated for
his work in creating the book. From there, he can just self-publish his word
document or whatever. No marketing, no editors, no overhead. Now if you
account for the cost of paper to print that book out, it ends up not being
very much. Therefore, it's pointless to want an ebook for less than a printed
book. You're paying for the author, not paying for the paper.

------
sid0
I'm not sure what Dan's point is. Customers know that digital versions cost
publishers much less money. Pricing them higher is obviously going to make
users feel disrespected and think "greed indeed", as a review stated.

And maybe it's because Dan and I are using different definitions of
rationality, but I also don't see how the 1-star reviews are irrational. I
think fairness is a big part of rationality, and the thought that "as readers
we should pay a little less attention to minor differences in price" is
shockingly short-sighted. Behind the 1-star reviews is a deep-seated and
_completely rational_ worry that if the higher pricing works, in the long
term, sellers will be encouraged to bump prices up even more.

Edit: There are comments to the blog post about how the pricing makes sense
from a "traditional economics" viewpoint. I don't know much about it, but if
traditional economics doesn't take humanness (respect, fairness) into account
then it's just a failure on the subject's part.

~~~
pixcavator
>>...humanness (respect, fairness)...

“Cheapness” is the word you are looking for.

