Selling Radiohead's OK Computer for $1.99, as Amazon.com is doing, strikes me as a good way to combat free. Recent titles in the $1.99 bin have been Beirut's Gulag Orkestra (still on sale) and Inxs' Kick. For $1.99 I'm sure some people would rather buy it than dig up the CD and rip the songs to their hard drives. Laziness has its price.

No doubt these albums are actively traded on file-sharing networks. As long as people prefer P2P, that will be the case. Some people will be enticed to buy a title on sales Amazon.com's MP3 store, and the album would move (fewer) units even at regular price. iTunes faithful stick with their favorite store regardless of the higher prices. This tendency to acquire music at certain places can be explained by the venue hypothesis that was outlined in the recent Economic Insight paper by the MCPS-PRS Alliance titled "In Rainbows, On Torrents" (get PDF here). From the report:

The venue hypothesis suggests that even when the price approaches zero, all other things being equal, people are more likely to act habitually (say, using The Pirate Bay) than to break their habit (say, visiting www.InRainbows.com). The implication of this 'venue hypothesis' is that if you wish the customer to deviate from his habitual action (and try a new venue), then you must offer him an improved venue, at least in his perception.

In this case, it's not as simple as asking if Amazon.com's MP3 store is an improved venue. There are information aspects to consider: How many iTunes shoppers even know about these sale prices at Amazon.com? And consider both price and frequency of sales. Even a handful of on-sale titles can't compete with the free selection of songs found via P2P.

I see a good strategy at Amazon.com: Lure people with short sales that are almost too good to pass up, offer a broad selection of well-placed titles at higher prices, and incorporate digital music into the broader shopping experience. It's the Best Buy method of selling cheap music, only the selection is much broader. People are still going to shop at iTunes and eMusic, some people will continue to get music on file-sharing networks, and people will still share music with friends, but I think Amazon.com has a good approach in using impulsive, totally incremental sales that could lead to greater loyalty and more frequent visits.