iTunes no longer the 99 cent store, but what will it be?

In a perfect free-market world, the price of products is not sticky. It fluctuates with the same rapidity as the change in demand. It shouldn't come as a surprise, then, that Apple is about to free its cash cow, iTunes downloads, from the 99 cent price point. Starting April 7th, according to the Los Angeles Times, you could be paying up to $1.29 for tunes from Spoon's Ga Ga Ga Ga Ga, and (theoretically) less than 99 cents for tracks of unpopular music. On the bright side, the tunes will be free of digital rights management handcuffs.

The open question is what algorithm Apple will use to set the price, and how quickly the price will change. It could simply monitor download requests and raise the price on the fly for those songs that are most popular. However, this could work to its disadvantage. In psychology, we were taught that a partial reinforcement schedule is the hardest to break. That is, sometimes when we press the bar, we receive a treat; sometimes not. If we always get the high price from iTunes, we might walk away. If we sometimes get the low price, we remain hooked.

As long as Apple has the best selection, the easiest downloads, and the most dedicated devices, it can continue to milk iTunes. The higher the download price, however, the more likely it is that competition will eat into its market. Will $1.29 fall within the law of diminishing returns?