Changing Price Elasticity of Digital Goods: Empirical Study from the E-book Industry

Many industries including music and e-book industries have been making or already made the transition from physical to digital goods in a couple of decades. Since the transformation fundamentally affects the cost structure, consumers’ purchasing behavior, and other critical factors in the industries, it is important to understand the changes that the transition has brought about. This paper empirically explores the dynamics of price elasticity of e-book demand. Since the e-book market has been rapidly growing in recent years, consumers’ price sensitivity and its dynamics should be investigated to develop an optimal pricing strategy. We use massive industry sales data and find that 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.