Information goods are "machines"?

Information goods are commonly noticed by economist because of its zero marginal cost (Varian, 1995), non-excludability, non-rivalry, and non-transparency (DeLong, 1999). Focused on these features of the product itself, researchers used the copyright system, market power with bundle pricing (Bakos and Brynjolfsson, 1999, Varian, Shaprio, 2004), or gift-exchanging models to solve the trouble brought by them so as to draw information goods back into the classical economic analysis. However, some facts in the modern information goods market cannot be ignored any more. First, copyright system is very costly, not only due to the obvious supervision cost, but also the high transaction cost from the failing to locate rights from occurring (Varian, 2007). Worse, with the piracy's unremitting interruption from all around the world, the copyright system is unstable. In developing countries such as China and Brazil, the music and software have been marked as "free"goods, which, interestingly enough, does not hurt the industry much or even promote it by bring competition (Anderson, 2010); developed countries also do not survive if you think of the world largest piracy's website "The Pirate Bay" who recently declared to move their server onto the moon to avoid any legal limitation. As DeLong(1999) noted, reforming the law to give sellers a property right in information about the prices that they charge appears extremely dangerous; there has never in the past been a legal right to exclude competitors from access to bulk pricing data. Piracy, undoubtedly, proved this well; but it brings another problem, which is showed in the gift-exchanging model that relies highly on the people's gratitude (George Akerlof, 1985): people gratitude is not always trustworthy, and, treating information goods as public goods also needs high transaction cost.

But wait, what on earth bring the tough problem to information goods. The zero marginal cost? Then who cause this low cost? The intangibility of the goods? Close but not exactly. My answer, the thing I want to emphasize in this article, is that: it is the world's easiest last step of the producing process of information goods, which fosters millions of consumers into the sellers' competitors, that drags information goods market into quagmire.

Why do I care much about the producing process? According to the Baumol (1982), the production directly determines the cost structure, which, will have significant influence on the market structure as well as market behavior of firms. Information goods has a high-fixed-cost / low-incremental-cost structure(Varian, 1995) due to its long and complicated R&D procedure but a "click-copy" manufacturing process. Varian had noticed the absolutely low-incremental cost that makes the information goods market into a monopolistic competitive one; whereas, he ignored the relatively large gap of fixed cost and variable cost. Actually, nearly everybody got lost in the miraculous zero marginal cost. But I must emphasize the word "relatively" because it will move people's eye from the small marginal cost to a new view, to one of the most common scene in the economics world, buildings, cars, CPU, iPhone, to what we call: durable goods. Durable goods, sometimes also called investment goods, are defined as "goods that yield utility over time rather than completely consumed at one time" (Sullivan, Sheffrin, 2003). I think this definition needs to be revised. As Thompson (1920) noted,  consumers' real target are the utilities in the goods, not the goods itself. This elaboration helps to clarify that the criterion that classified goods in to durable goods(investment goods), non-durable goods( fast-consuming goods), and services, are actually the quantity of utilities embodied in one unit of goods. That means, durable goods, with larger deluge of utilities set in, can not only release the utilities over time, but on space.  Under this definition, the word "durable" is not much proper; "investment goods" fits more. Then, information goods, which may wear out as soon as being released but has an infinite potential to feed the whole population's desire by unlimited costless copying, is incontrovertibly an investment good.

The advantage of treating information goods as investment goods is that we could jump out of the thinking of how to price the information goods when the marginal cost is 0 which then brings you into an infinite "Market Power vs. Social Welfare" debate. Investment goods, machines? Yes, information goods like machines, or more precisely, a "die". When firms sold an information good, they do not simply sell one consumption good, they sold them a die, with which and a computer, everybody can manufacture and share (because of non-rivalry) the good. This final production process is so simple, disperse, and technically hard prevented, that completely eradicated them is nearly impossible. So why don't IT firms change the mind to sell their goods only to consumers who want to put an investment on them? Or use the information goods as an investment of themselves and produce more service or non-durable goods? Lots of examples have been created by various markets of information industries: musicians put more attention on concerts and performance than on selling CDs; Google sends more efforts on producing people's effective attention than selling software; and so on.

Is this the bright future of firms in the world of piracy? Is this the hope of firms still suffers the "patent minefield" in the world of copyright and patent? I believe so.

Reference
Bakos,Yannis, Erik Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Efficiency, Management Science, Vol. 45, No. 12, 1999, pp. 1613-1630
Baumol, William, Contestable Markets: An Uprising in the Theory of Industry Structure, American Economic Review, Vol. 72, No. 1, 1982, pp. 1-15.
DeLong, J. B., A. M. Froomkin, Speculative Microeconomics for Tomorrow's Economy, 1999, presented at Brian Kahin and Hal Varian's January 1997 Harvard Kennedy School conference.
Sullivan, Arthur; Steven M. Sheffrin. Economics: Principles in action. 2003, Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p.302. ISBN 0-13-063085-3.
Thompson, Charles. M., Elementary Economics, Chicago, B.H. Sanbom & Co., 1920
Varian, Hal R., Pricing information goods. Proc.Scholarship Nezv Infornm. Environment Sympos. Harvard Law School, Cambridge, MA.,1995, Differential pricing and efficiency, SIMS Working Paper, Berkeley, CA.
Varian, Hal R., J. Farrell, C. Shapiro, The Economics of Information Technology, 2004, ISBN: 0521844150
Varian, Hal R., Copyright Term Extension and Orphan Works, Industrial and Corporate Change, Vol. 15, No. 6, 2006, pp. 965-980


Sherry Xiao Wang
@COPYLEFT ALL WRONGS RESERVED