Voting With Dollars

At my local music store, I can buy a new copy of the album Love and Theft for $15. Alternatively, I can buy a used copy of the same album for $8. Given that the used copy is refundable in the the case of defect, the latter product seems to constitute a nearly perfect substitute to the former.

Given their similarities, why would anyone faced with such a choice buy the new album copy? Assume that I value owning the Love and Theft by $25. My consumer surplus (i.e., value above price) in buying a new copy, therefore, is $10 ($25 minus $15).

On the other hand, my consumer surplus in buying a used copy of the same album is $17 ($25 minus $8) less the expected inconvenience cost of making an exchange should the used product malfunction. Liberally assuming that I am inconvenienced to the tune of $30 should the used product malfunction and that the product malfunctions 10% of the time, I am still left with $14 of expected consumer surplus ($17 minus $3) when buying a used copy of the album.

As $14 is sizably greater than $10, it seems that a new album should never be purchased in the presence of a used copy of the same album. However, any music store employee can tell you that such a choice is made all the time. The very fact that their prices are so different implies that many consumers are unlikely to view them as nearly perfect substitutes.

Rather, consumers are getting something, besides the convenience of knowing that the CD will work properly, in purchasing a new copy of the album. It appears that new album purchases allow the consumer to vote, with dollars, on the future state of music. If a consumer wants to encourage a particular musician to continue making a particular type of music, dollar transfers are as good a way as any.

Dollars spent on new albums can signal to the musician and his record label whether a work is appealing. Further, such expenditures allow the sufficiently well-received musician to focus on music as a vocation. In buying a used copy of the same album, I am not transferring dollars to the musician but primarily to the fan who abandoned him.

One should not underestimate the value many music consumers hold for artistic voting rights. Several friends I've known will purchase piratable music on the grounds that they wish to help keep a favorite musician in business.

Such consumers see the dynamic efficiency in paying for their wares, which means that an unevolved, myopic person such as myself can walk into a music store and pay a lot less for a used album.