Chapter 2 Flashcards
What is an information good?
An information good is any product that can be digitalized (e.g. music, software), has high fixed costs (as developing the software) but inexistent marginal costs (as doing more copies of an album).
What are the 5 properties of information goods (no need to enumerate), define all of them.
- Non rival: One person’s use does not decrease the availabilty of others
- Infinitely expansible: They can be replicated with ease and without limit
- Discrete: The quantity can be 1,2,3… digital goods show indivisibility
- Intangible: They are nowhere and everywhere at the same time
- Recombinant: Can be combined to create new products
What concept/theory is first-copy costs? How do they relate to marginal costs in digital goods production?
First-copy costs are the significant costs of producing the first version of a digital good (e.g. software). The relationship between first-copy costs and marginal costs are that the marginal cost here is 0, due to the invisible cost of producing more units.
Why do these “first-copy costs’ dynamics” lead to large economies of scale?
This cost structure of information costs leads to economies of scale because, after covering the (high) fixed costs, each additional unit allows to have a higher profit margin (due to MC = 0).
Why is product differentiation important in information goods markets?
Product differentiation is crucial because it helps firms avoid price competition that can push prices down to marginal costs.
How can differentiation prevent prices from falling to marginal costs in highly competitive markets?
By offering unique features or tailored services, companies can create value that sets them apart from competitors, allowing them to maintain higher prices and margins.
Why is piracy a bigger issue in the digital economy compared to the physical economy?
Piracy is more prevalent in the digital economy because digital goods are non-rivalrous—their use by one person does not prevent others from using them. This makes it easy to replicate and distribute digital goods without permission, unlike physical goods, which are limited by scarcity and production costs.
What is a temporary monopoly in the context of the digital economy? How do innovation and network effects contribute to the rise and fall of temporary monopolies?
A temporary monopoly occurs when a company dominates a market for a limited time, typically through innovation or network effects. However, these monopolies are temporary because new technologies or competitors can disrupt the market
