Amazon has been selling eBooks at a loss in order to increase sales of the Kindle.  Amazon would buy the eBooks whole from publishers at about $12 and then sell the eBooks for $9.99.  But book publishers, who have been used to more than a decade of high profit hard covers, view these eBooks as a threat to their business rather than an opportunity (seeing a pattern here recording industry?).

Macmillan demanded Amazon change its pricing, focusing on more expensive $12.99-$14.99 charges for new books. Because of Macmillan’s demands, Amazon removed all digital and hard copy versions of Macmillan’s books.  The books and digital versions have since returned with the Amazon agreeing to taking a 30 percent commission from eBook sales rather than buying them wholesale. The result means Amazon will actually make money now on eBook sales and ironically, book publishers make less (30 percent of $15 is still less than the old wholesale price of $12.99-$14.99).

You have to wonder whether Macmillian and book publishers have paid any attention to the past 10 years, watching the recording industry shrivel up as it fought tooth and law brief against digital media (and still hasn’t given up on its road to irrelevance).  First, my belief is that book publishers know increasing eBook prices will hurt sales. This is made apparent by several publishers’ urging to delay eBook releases for weeks after the hard cover. Much like movie companies delaying Netflix rentals a month after the DVD is released, book publishers don’t want to siphon readers away from their high margin hard cover books.

Of course, this only annoys customers. If customers want the eBook but one is not available, there are more than enough unauthorized versions on file-sharing networks on the day of release. You can’t compete with free by staying home and sulking.

But then book publishers want to charge higher prices. Well, let’s see how well that done for the recording industry on iTunes. iTunes allowed higher and lower prices on music beginning last year and the results have shown such a large drop in unit sales that overall revenue is down.  Growth in digital sales slowed from 20 percent in 2008 to 8 percent in 2009. While yes there was still growth, that is a massive drop in a still infant industry. The price elasticity of digital goods is extremely sensitive to increases in prices (and seems even more sensitive to drops, as video game download service Steam has successfully proven with its sales).

As I and others will say over and over again, digital goods are infinite goods. Basic economics says their price should be zero. And there are several examples of free eBooks actually increasing the sales of the actual book. But economics and real-life examples don’t matter when you have a former monopoly on distribution to protect. But business evolves and like the recording industry, book publishers may be in for a difficult decade.

Game developers have frequently lamented the drive for lower cost games on the iPhone.  “The push to 99 cents is the single most frustrating and terrible thing about App Store pricing,” says Nathan Vella, co-founder of Capybara, makers of Critter Crunch. “Since it became ‘expected’ by consumers, it forces a lot of developers, specifically indies, to devalue their game and significantly increase the number of sales needed for developers to get back their investment.”

But what Vella thinks as devaluing is really basic economics. Competition, the healthy and rewarding heart of capitalism, encourages makers of goods to try to one-up each other, whether by lowering prices or offering a more compelling product.

The App Store, with more than 100,000 applications, 13,000 of which are games, competition is pretty fierce. It is to be expected that price will be pushed down. Most game makers have stayed around 99 cents, so if someone really wanted to stand out, maybe they should sell at 98 cents. Or there’s lots of free games and that soon might become “expected”. Not even including truly free apps, estimates (which I strongly question) claim 75 percent of apps are pirated meaning Vella and game developers have more to fear from free than 99 cents. If Vella thinks 99 cents devalues his games, how will he feel when he’s forced to sell it for free?

iPhone developers, like many in the media industry, forget that price and value are two different things. Value is subjective. I, as a consumer, value a game a $10. As long as the price is less than $10, I will buy the game, even if it is $2. The developer chooses the price that will make them the most money, specifically by setting the price low enough as to attract the largest number of buyers. The $2 price in no way devalues the game. While I might have paid more, 10 other people might not have. Meaning the developer attracted more purchases and made more money over all. This is known as price elasticity.

We see evidence of this in many digital services. The PC game Left4Dead took 50 percent off its price and jumped 3,000 percent in sales. Variable pricing on iTunes led to lots of $1.29 songs and very few 69 cent songs. Those higher priced songs have seen enough of a drop in unit sales that overall revenue is lower. Maybe at 69 cents, they’d actually make more money.

For game developers, it seems the App Store just has too much competition to make it easy for anyone. There are so many games vying for attention, thanks to the low cost of entry (until traditional gaming consoles), that its a major challenge to get the attention of enough consumers willing to pay the 99 cents (or even pirate it). The benefits of the Long Tail in the App Store necessitates better search and organization to help people find the apps they want (the App Store does lack this robust a function). But game developers can look for their own solutions to stand out by using social media, pricing, and excellent games to build the buzz. It’s not Apple’s fault, it’s not consumers fault, piracy’s fault, or other developers faults. It is up to each developer to give consumers a reason to buy their game.  If consumers don’t pay, then change what you’re doing. That’s innovation and competition makes sure it happens.

Even as DVD sales plummet, DVD rentals rose 4.1 percent to $6.5 billion in 2009.  This rise happened even though 3.2 percent fewer rentals happened in video stores. Rather, the increase is most likely attributed to the 94 percent increase at rental kiosks like Redbox, which has been under attack by movie companies for siphoning their business with cheap $1 rentals. Those $1 rentals (and low-priced used DVD sales) added up to $1 billion in revenue for Redbox. So lower price, more money. Maybe movie companies will recognize the basic economics at work and stop fighting successful business models for people willing to spend money on their movies.

All the manufacturing jobs leave the U.S. for China, India, South America, and eventually Africa, the U.S. will face more economic competition for both products and minds. To remain and be a knowledge leader throughout the next century, the U.S. has one massive industry that cannot be easily copied – universities.

Higher education in the U.S. is unmatched by any country. U.S. universities dominate international rankings. Shanghai Jiao Tong University awards the U.S. with 54 spots on the top 100 with the U.K. trailing with 11, Germany at 6, and downward. Many of our universities are famous and respected because of centuries of history and the prestige and connections that provides, something not easily replicated by young yet also top schools in India, China, and other emerging powers.

First, I bringing this up as, amid the global recession, universities are at risk. California is slashing university funding and endowments at Harvard and other universities have seen 27 percent losses. Also most threatening is the drop in foreign applications to U.S. universities, the first drop in five years (when the last drop had more to do with 9/11 than economics). Prices for U.S. universities have skyrockets, more than three times more than inflation, while the government makes attaining visas even harder.

But we should want foreign students coming to study in the U.S. This encourages the next generation of business leaders, scientists, and artists to spend four or more years in the U.S., spending money, learning our culture (and selfishly, learning English), and then hopefully staying to work here or, at least, doing business with us.

This is why limiting H-1B visas is so dangerous for the U.S. economy. One out of four tech companies are founded by immigrants who then create far more jobs than they take away. Even without starting companies, our current tech companies cannot fill all the high-tech jobs they need, but are limited to only a few foreign hirers. Instead, these highly trained and would-be highly paid immigrants return to their native countries to start companies there.

Monday, I will discuss how universities structure, from price to format, is undergoing a radical shift that requires forward-thinking and evolution.

Hank Williams, author of the blog Why Does Everything Suck, has a cynical view of the recent economic crash claiming that it has more to do with technology making people and their jobs obsolete. But the numbers, and some history, show this to be completely untrue.

Williams writes:

The problem is that we are in this awful in-between phase of our planets productivity curve. Technology has vastly reduced the number of workers and resources that are required to make what the planet needs. This means that a small number of people, the people in control of the creation of goods, get the benefit of the increased productivity. When we get to the end of this curve and everyone can, in essence, be their own manufacturer, things will be good again. But until we can ride this curve to its natural stopping point, there will be much suffering, as the jobs that technology kills are not replaced.

The fact is technology, throughout history, has increased the number of jobs, not diminished them. Further, the new jobs created are often higher paying jobs.  ATMs, for instance, do away with bank tellers, but then we need people to make and maintain the ATMs.

I wrote about this trade off several months ago. I linked to a Slate article listing the dozens of industries put out of business by new technology over the last century. Yet instead of declining jobs and growth, the  last century has been one of prosperity.

Technology helps make us a more efficient society, allowing fewer people to do one task and devote time to another. The U.S. used to employ the vast majority of its citizens in food production, but now less than one percent of our GDP comes from agriculture yet we produce more food than before. All those people once focused on growing and harvesting food went on to build new industries like movies, air transportation, computers, and the internet.

Speaking of the internet, how did that Dot Com Boom go? A massive increase in job creation in an all new industry not seen before. Yes there was a crash, millions of jobs lost. And you know what? We recovered and built sustainable jobs in that same all new industry.

Of course, it would help if Williams looked at where the jobs are actually being lost.  The financial industry hasn’t lost more than 300,000 jobs because of better technology, but rather unregulated greed, corruption, and bad investments. The mortgage and construction industries have lots hundreds and thousands of jobs because of more than a decade of over investment and now a large drop in people not wanted to buy new houses.

The jobs lost are not just low-skilled or low-income jobs. This economic crash is the result of many, many issues including many industries not adapting to new technology rather than simply being made obsolete (see the auto and newspaper industries). After the end of this recession, the U.S. and most other countries will have reprioritized their resources, both in terms of dollars and labor. Maybe more people will be available to research and build a massive green technology industry. How about turning stem-cells into a viable business? What haven’t I thought of? Who would have thought 10 years ago that writing 140 characters would be a billion dollar business? By removing some jobs, we free up resources, both people and dollars, to do more in other places.

I began working at Leslie Hindman Auctioneers a few months ago (hence my sparse blogging) and have watched basic economics at work. Two or more people bid against each other, offering more and more money until no one is willing to spend more. In traditional commerce, the goal is not to sell to the highest bidder, but set your price to attract the largest number of buyers. This is the difference between value and price. Value equals what each person is willing to pay while price is what the actual cost is.  A few months ago, I wrote about customers, or individuals, can be wrong in the marketplace, but as a whole, the market is always right.  The market is a greater indicator of what’s valuable and for how much. Auctions are a microcosm of these market effects. In auctions, we get to see how value, price, and markets can work for and sometimes against each other within very small sets.

Within our capitalist society, our goal is to make money.  For many, this means selling goods. So in any auction, the goal is to sell each good, or lot, for the largest amount of money.

Let me walk you through an auction example where I explain how value and price differ. I really want a painting.  Another person, Jack, also wants this same painting. I am willing to spend $15,000 maximum on this painting, meaning, I value this painting up to $15,000. Jack is only willing to spend $10,000, meaning he values the painting at up to $10,000. We both bid on the painting until Jack bids $10,000. I bid $11,000. Jack only values the painting up to $10,000, so anything higher would be a perceived loss for him. The price is too high compared to the perceived value he receives. I buy the painting for the price of $11,000, $4,000 less than my perceived value.  This is a net gain for me because the price was lower than my perceived value. The painter owner still gets $11,000, the auction house gets its commission, and I get a painting I really wanted. Everyone wins, even Jack who keeps his $10,000 to spend on something else. Because the painting sold for more than he valued it at, he did not loose anything, whereas had he spent more than his maximum, he might have felt like he lost something.

Now some may not agree this was a win-win-win-win. Because I was willing to pay $4,000 more, the owner and auction house lost out on more money. But according to auction (and marketplace) rules, I only have to pay more than the last bidder. So if I were asked to then pay more than the $11,000, I might feel cheated or like I lost something because the market, comprised of Jack and me, deemed the painting should be priced at $11,000.

This is where auctions show the ignorance of the individual and the wisdom of the market. People selling their goods through the auction house, called consigners, can place reserves on their goods. Reserves are the minimum price a consigner is willing to sell the good for. If the auction price is less than the reserve, the item goes unsold. Auction houses often provide low and high estimates appraising the value of the good and the reserve cannot be higher than the low estimate.

So let’s apply a reserve to my previous example. Let’s say the consigner has a $15,000 reserve on the painting.  This is the consigner placing a price on their good based on what they believe other people’s perceived value will be. This is why problems in commerce occur – when the seller and the buyer’s views of value fail to meet.

But I was willing to pay $15,000, you say. True, but that was based on the understanding that someone else was willing to pay $14,000. Because I now understand what the market values the painting at, $11,000, I may change my own perceived value of the good. Think of it as competition pushing the price (not value) down, because I know no one will pay more than $11,000.

So the auction house may try to arrange a private sale between myself and the consigner where I may raise the payment price and the consigner may lower their reserve – the price they are willing to sell for.  If the consigner sticks with $15,000 and I am unwilling to pay it, we both lose. I don’t get the painting, and they get no money. Maybe they’ll make more at a later date, but they might also make less. During that time, I might buy another painting and no longer want this one.

How can we apply this to the price of free and all the industries challenged by it? First, the price of free is not representative of value as so many content producers confuse. The painting, and many auction items, are sought after because of scarcity and unique qualities that give them high value. Since buyers cannot find this same value in other goods, they are willing to spend money to buy the goods. Newspapers, music, and entertainment programs are no similarly scarce and unique, rather, they are quite ubiquitous and easy to find. If I can watch one TV, I have 500 other channels to pick from, plus on demand, plus online sources, play other media like video games to spend my time.

Auctions, as I said, are a microcosm where only two people are needed to bid up the price of a good. This is attributed to the aforementioned scarcity of the goods – if you only have one or two to sell, you only need one or two buyers. For general consumer goods, auctions would not be effective since companies need to sell hundreds if not millions to meet their desired profit goals. So companies have to balance price with their assumption of the market’s average perceived value of their product in order to sell the largest of number of goods at the highest possible price.

As we are seeing, many industries are setting higher reserves on their goods than the market is willing to pay. Music companies want licensing fees so high that TV shows can’t be released; gene patent holders charge to much for researchers to license. Movie companies are trying to force more money from Redbox and newspapers think consumers will give up free blogs to pay for online news.  All these industries ignore what the market is saying, instead trying to say they are smarter or more attune to the value of their own products. But value is not about what it cost to make or how much time was spent making it. Value only matters for how much people are willing to pay. If consumers are not willing to pay anything, then no amount of government intervention or PR manipulation will change that. The market wants what the market wants and the market is still always right. Instead of fighting the market, recognize their wisdom and find a way to make money in the new market. It’s a lot easier, cheaper, and more profitable than trying to change how the market, and basic economics, works.