Session 3 Flashcards
Examples of Information Goods
For information and entertainment: e.g., pictures, audio files, video files, news, computer software, newspapers
Symbols, tokens, concepts: e.g., virtual rewards, tickets, reservations, financial instruments
Processes and services: e.g., public services (e-government services), auctions, interactive services
What are information goods?
• An information good is a good whose unit production cost (including the cost of distribution) is negligible compared to its development cost.
Once an information good has been developed…
additional units may be produced and distributed at virtually zero cost, for example, by allowing it to be downloaded over the Internet.
MC = 0
In contrast: with industrial goods, the unit costs of production and distribution are often dominant.
Utility of information can be strongly dependent on…
…the time of consumption (e.g., news articles, weather forecasts, e- tickets)
Yet, information goods can be very easily archived and accumulated. In this way, accumulated information can be used to generate long-term assets and new information goods (e.g., archiving daily weather forecasts can help making long-term forecasts).
Very often, the utility of an information good depends…
- on how many other consumers are using the same good
(direct network externalities), e.g., whatsapp, skype, or video games.
- on the number of a second group of agents on a market or platform
e. g., restaurants on a review platform (e.g., Yelp). Here, the utility of information for a consumer depends on the number of other consumers/review writers and on the number of restaurants on the platform (indirect network externalities).
Utility of content can increase with…
exclusivity (for instance, stock price information), but this is very difficult to maintain in information goods markets.
Physical Nature of Information Goods
- Indestructibility
- Transmutability
- Reproducibility
Indestructibility?
● While long-lived consumer durables (e.g., washing machines) will stop working one day, this cannot happen to information goods.
● There is no “second-hand“ market for information goods
● A firm is competing with its own sales in the previous time period. In fact, it loses market power by its own sales, which is referred to as: the Coase Conjecture.
● Business model impact: Frequent updating & licensing
Coase Conjecture
- The sales of consumer durables in one period decreases the demand for this good in the next period.
- The demand decreases, so prices have to decrease as well.
Coase Conjecture problem?
Consumers can anticipate a price decrease and defer their purchase to later to wait for price decreases. When consumers are under no pressure to purchase, the pressure on the producer grows. Ironically, under this situation monopolists can behave as if they were in markets of perfect competition.
How can producers remedy Coase Conjecture?
- Credible and fixed price announcements
- Rental models
- Steady updates of products
Transmutability
• Extremely customizable
• Easily modified
• Producers lose some control over the integrity of their
products
• Business model impact: Differentiation by customizing
& updating, selling as services and not as products.
Downside of Transmutability
Fake products
Reproducibility
● First unit of an information good involves high costs, afterwards they are easily reproducible
● Every other unit can be reproduced for virtually zero cost and with virtually no capacity restraints.
Reproducibility: Natural monopolies tend to emerge in these situations, due to…
- Decreasing average costs
- Barriers to entry due to high fixed costs
- “Winner-takes-all” markets
Supply-side Economies of Scale
Scale effects of Industrial Goods
- Induced by the supply side
* When the number of units produced grows, the average costs per unit decreases
Supply-side Economies of Scale
Scale effects of Information Goods
- High costs of production for first unit
* Almost zero cost for any other unit after
Supply-side Economies of Scale
Reasons for scale effects - Industrial Goods
- More efficient production facilities
- Better processes
- Improved purchase prices
- Employer learning
Supply-side Economies of Scale
Reasons for scale effects - Information Goods
• Easy reproducibility
Implications for market structure
Commodity goods/ perfect competition unsustainable
- MR=MC means that in a competitive market prices will be driven to zero
- High fixed costs cannot be recouped
Certain other market structures are possible
- Dominant firm/monopoly with entry barriers
- Highly differentiated product
What to do to achieve sustainability? Supply side
Supply side – cost strategy
• Reusability: sell the same thing again
What to do to achieve sustainability? Demand side
Demand side – revenue strategy • Differentiate your product: add value to the raw information to distinguish yourself; target specific market • Move to advertising model • Build a network / community • The key is to learn your customer!
How to get to know your customers?
● ask for registration
● observe queries
● observe clickstream
● behavioural targeting
Pricing of information goods. When marginal costs are close to or equal to zero, value- or utility based pricing makes more sense than cost-based pricing.
● Interactive determination of prices (e.g. auctions, stock markets)
● Fixed prices (most often used)
○ Sellers sets prices
○ no interaction between buyer and seller with respect to prices
○ “take-it-or-leave-it” offer
○ Examples: pricing with respect to buyer characteristics, usage characteristics, or product quality.
Monopoly – Market Power. A firm sells a unique good that provides barriers to entry, such as:
- Patents
- Governments Regulations (exclusive licenses)
- Economies of scale
- Exclusive access to an important input (diamond)
- Technological innovation
Producer rent (PR)
Revenues above marginal costs
Consumer rent (CR)
difference between what consumers would have paid and what they are actually paying
Dead weight loss (DWL)
potential rent neither captured by producers nor consumers so it is lost
