Distinguish Information Goods from Information Service

Several days ago, someone asked me a question: what do you think of the free information goods? This is a question to all the IT firms with a nice information goods but no profit generating mode.

It's a hard question without any clear solution to me. According to the basic economics principles, information goods should be priced at 0 to reach the maximizing social welfare. So I am always wondering that, is there any sustainable way for information industry to develop? Before seeking answers to this question, let me first explain why information goods should be free.

Information goods, which are always digital materials, typically have the property that it is very costly to produce the first copy and very cheap to produce subsequent copies. For example, it costs a lot for Microsoft to develop the Windows system; but making copies won't cost more than 1$ per each. This cost structure poses special problems for pricing the information goods. [Pricing Information Goods, Hal R. Varian, 1995] If the market is purely competitive, then Price(P)=Marginal Cost(MC). For information goods, since MC is close to 0, the revenue won't cover fixed cost for the company, which ends up the story with one monopolist living while others died. Then the monopoly will gain a chance to use its market power for abnormal profit, which is essential to cover the fixed cost. This reasoning, as a result, turned the scholars' attention to the market where producers have some market power. In such kind of articles, pricing strategies like fixed fees, per unit pricing [Fixed Fee versus unit Pricing for Information goods, Fishburn and Siders, 1997], pricing discrimination, pricing bundling [Aggregation and dis-aggregation of information goods: Implication for Bundling, Site Licensing and Micropayment Systems, 1997, Bakos and Brynjolfsson] are evaluated and explained. In general, now people think the monopoly and accompanied welfare loss must exist in information industry.

However, I hold a different opinion. The direct proof is that, there is definitely some free information goods in the industry, such as Wikipedia, Google Search engine, Linux operation system and so on. Their price is 0! In this situation, if we ignore the consumer loyalty, incomplete information, technical entry barrier and some other disturbing factors, the market is a good place for perfect competition since consumers will always choose the best one without any bargaining on marginal utility, which deadly weakens the market power based on price.

But, that deduction has a very fragile assumption: firms selling free information goods must gain revenue to survive. Then, an obviously question raise, how can 0 price product gain revenue? If the firms have a key, is the gaining enough to cover the fixed cost to the information goods?

First of all, let me use some examples to toughly answer the first question. In the current information industry, there are four primary profit keys: Ad, Supporting service, Rent, Data selling. Ad is the most universal one. Take Google as an example. To sell Ads, they have to another "consumer" which is a little different from their free-products' consumers. These profit-product consumers contains all people wants to should Google's free-products users Ads through Google. Yet, Google is not just rent-receiver of its platform, but a information service seller. For example, in Google Adwords, by analyzing their users' searching behavior, Google gets the information of users' tastes, and then offer the advertisers a service to push their ads directly to whom most likely want to see them. Actually, for Google, their information goods like Google search engine and Gmail seem more likely to be a "cost" to their Adwords service since those goods help getting the consumers' attention and relate data. Supporting Service is also a profit-generating methods for firms in the information industry. This way is commonly used by software firms like Tencent and Linux. These firms provide their basic products for free to consumers, but charge on additional support service, which they call "value-added service". Some people may ask, should the price of these information services like ads and software maintenance also be 0? The answer is no. First, the information service does have marginal costs like labor cost. Also, since no private service can be offer at the same time or same place, the information service is always scarce. This is a crucial property of information service different from free information goods which is not scarce any more when there is no limitation on copies. Some scarcity generates rent for the firms as well. Rents, as mentioned above, is a kind of capital cost generated from unique asset of an IT firm. Such assets includes fixed ones like servers and virtual ones like system service. Amazon, for example, charge fees to commercials that open Amazon online stores, just as most other online retailers do. Data selling is little risky and maybe illegal for IT firms to use. I will write more about it after further research on it.

From my answer to "how can 0 price product gain revenue", my view on "information goods" and "information service" has been clearly expressed. Information goods should be separated from information service in concept. Information goods should be sold in 0 price in a competitive market or in a market where one of the firms sells it for free. Information service, however, is reasonable to have a price like other normal goods or service. The difference between information service and other services is that it uses information goods to attract free-product consumers to build the base of the service. In the above, Ad, Supporting service, Rent, and Data selling are all information service. Information service will give a cross-subsidy to information goods, which gives IT firms a possibility to provide them at 0 price. Later, I will write more detailed explanation on information service.

So, here comes the second question: can information service gains enough to cover the fixed cost to the information goods? Can we calculate it? One step further, if information service is not strong enough to help an IT firm with a great information good to survive, like Facebook, what should this firm do? Is information service a necessary part of an IT firm? I am still looking for the answers.

Welcome to any discussion.

My First Tutoring

This afternoon is one of the most challenging afternoon since I came to the US. I acted as a tutor to an undergraduate student with her economics homework. This is my first step trying to enter the Americans' circle. I was always worried about my English, my accent, and other cultural differences. But, it is time to move forward.

I went over the whole microeconomics book and prepare myself with some tutoring words before we met. Yet, this afternoon gave me as much shame as delight of success.

I was always proud of my clear logic structure and high score in economics field. But when I faced my girl's problem, I was totally shocked.  For some questions, I cannot interpret her with the most basic logic because of my obscure comprehension on them. For some other questions, like something on international trade and tax, I felt so strange to the field that I even has to ask her what she had learnt in class. I was confident to my store of knowledge in economics field both in the whole picture and the most basic logic. That really a caution to a graduate economics students like me.

However at the same time, I was delight that I overcame a great difficulty explaining questions and logics in English. I felt the language part of the brain is hot enough to break down! Whenever my girl showed her agreement to my words, I felt a little content. For the first of time, I satisfied myself by helping people to understand the world.

At the same time, I found a great difference in the undergraduate education in China and the US. In my undergraduate economics course, more attention was paid on concepts and equations. Whereas in this American girl's course, logic and empirical facts were the ones to be expressed. I cannot tell which is good or bad; but this difference tells me that the logic between the concepts, which is very important to the whole picture of economics, lacks my attention, and maybe most Chinese students' attention.

Anyway, this is my first tutoring experience. Thanks to Taylor.

Have a Try

This is my first personal page! Wow, it's time to get start.