The economics bloggers are, understandably, excited about Radiohead's decision to literally charge what the market will bear, allowing its new album to be downloaded for any sum you like, as low as a (British) penny. Tipping is, as Greg Mankiw points out, one of the most mysterious phenomena economists study. No one understands why the social norm is so strongly self-enforcing that Americans give tips to almost anyone who provides a personal service, even though most of those transactions are with people you'll never see again. Free Exchange calls it "a bold and potentially costly move for a band whose previous six LPs have sold millions of copies", but Tyler Cowen thinks that financially, it may be a smart move:

1. Radiohead is an indie cult band with extreme loyalties from its partisans and the possibility of attracting more such partisans by seeming "cool."

2. Radiohead peaks high on the charts (#3 for their last release, if I recall...) but I believe they sell the product pretty quickly and don't have a long run at the top. Again, they'd like to widen their fan base.

3. Radiohead's gambit has reaped enormous publicity, but this won't be the case next time.

4. Many donors will give to a highly visible "cause of the month" (remember the outpouring of support for the tsunami victims?) but they won't necessarily give on a regular basis.

5. Radiohead probably has an especially high ratio of touring to CD and iTunes income; see #1. This scheme is a natural for them but not for Kelly Clarkson.

What we will see is lots of lesser bands (and authors) giving their work away for free, but that trend has been underway for some time.

Obviously, I had to try it. It turns out that the download isn't quite free: there's a $1.00 charge for paying by credit card, and if, like many Americans, you forget to double whatever pittance you decide to tip them, you could end up paying quite a respectable sum.

This brings up one of the more interesting points. While the download is free, the physical discs with all the notes and bonus material are 40 quid . . . or about $80. This is quite a lot to pay for an album, even if you really, really like the band. So in effect, Radiohead may have created a really effective price discrimination system: the free download might not only rope in lukewarm fans like me who would have put off the purchase, possibly to forever, but also create goodwill that encourages more of their fans to buy the super-expensive (in America) discs.

Another way it might work is that the very popularity of the free (or low cost) download might force dedicated fans to spend a lot in order to signal their committment to the band. Music has a substantial status component to its consumption. If everyone and their lame younger brother has downloaded the new album for a pittance, you might have to order the discs just to set yourself apart from the hoi polloi.

There's another economic aspect that a reader pointed out: the exchange rate. Both downloads and discs are currently priced in pounds, and the pound/dollar exchange rate is both bad, and probably going to get worse. With Bernanke cutting rates, and Mervyn King of the Bank of England holding them steady, the pre-orders will likely get more costly by the day. This doesn't benefit Radiohead (rather the reverse), but it means that smart fans will lock in now.