Dynamics of price elasticity over time: Evidence from the e-book industry

Abstract

The e-book market has been rapidly growing in recent years due to developments in technology and the widespread use of mobile devices such as smart phones and tablet PCs. Although an e-book serves as a nearly perfect substitute for its corresponding paper book in respect of contents, it has many differences regarding cost structure and consumers' acceptance. Therefore, setting an appropriate price for an e-book is an academically interesting and practically important issue. Consumers' price sensitivity and its dynamics should be investigated to develop an optimal pricing strategy. This paper empirically explores the dynamics of price elasticity of e-book demand. We use a data set that contains information for records of e-book sales for the last two years provided by Kyobobook, the largest book retailer in Korea. The results suggest that the demand of e-books is becoming price inelastic over time. This can be partially attributed to the reference price, which has been constructed by consumers through personal experiences. We also find other factors that influence the price elasticity and demand of e-books. From the results, we discuss the broader implications on pricing strategy.