Techdirt, referencing Bob Lefsetz, draws an interesting parallel between the music and cellphone business models.
He [Lefsetz] also highlights how the idiotic focus on getting more per song, just as everything else about music and technology gets cheaper, is hurting the record labels much more than it helps them. He compares the situation to how expensive it was to use mobile phones a dozen years ago. People were scared to use mobile phones because the charges were ridiculously high. You only used it in special circumstances. Today, however, the rates are much, much lower and that’s massively grown the market for mobile services. Do you think the mobile operators would prefer to go back to $1/minute charges? Yet, why does the recording industry insist on $1/song charges when the infrastructure can support an entirely different model. Instead, make the music cheap and easily accessible.
As a general rule, in a competitive market, prices drop towards marginal cost. But if demand is elastic, then industry revenues and profits can still benefit from this.
Lefsetz makes the point with far more capital letters, exclamation points and indignation in his original post.