Information Goods Learning Objectives Describe the properties of Information Goods Explain what kind of market Information Goods typically operate in and why Explain and give examples of Metcalf s Law network effects Key terms Fixed costs vs marginal costs Perishable vs durable Rival vs non rival Excludable 2 What s an Information Good An Information Good is a collection of symbols also known as a digital good It s utility is a function of the arrangement of the symbols NOT on the material form they take Forms of music 3 Which is NOT an Information Good A patent for a new machine A new edition of a travel guide Advice from a financial advisor An oil painting A web site that contains data on leading economic indicators A CD of interesting photos 4 Info Goods in a Nutshell article Before the 20th century what was the primary form of information good What have some technologies improved presses computers etc done to the costs of publishing What has the Internet done to the role of publisher 5 Publication History 6 Content vs Conduit Author content Publisher conduit Customer In general a publisher plays two basic roles i he can use its network for distribution of information goods ii he filters the quality i e he uses his skills to select what he wants to publish and henceforth uses reputation to solve information problems for the customers 7 Properties of Information Goods 1 Information goods have High fixed costs Sunk costs Virtually zero marginal costs p price MR demand monopoly revenue competitive price P MC marginal cost q 8 Properties of Information Goods 2 Information goods are infinitely replicable 9 Properties of Information Goods 3 Information goods are easy to distribute 10 Properties of Information Goods 4 Information Goods are experience goods Value is only discovered after the good has been consumed Previewing and browsing Reviews Films books Reputation WSJ Times 11 Properties of Information Goods 5 Often Time Dependent Perishable 6 e g Weather Forecasts Stock Quotes News Indestructibility Durable Quality does not deteriorate over time software music CD video Why does a durable good manufacturer limit the durability of his goods What can sellers of digital goods do to overcome this problem of infinite durability 12 Properties of Information Goods Public vs Private Goods 7 Information Goods are Public Goods Non rival One person s consumption doesn t diminish the amount available to another Non excludable It is costly to exclude people who do not pay from consuming the good E g Lighthouse National defense TV radio broadcasts Private Goods specific copies 13 Special Characteristic of IG Owners of copies can act as publishers by reproducing their own copy and therefore can compete with the publisher This has implications for the pricing strategy of the publisher and the copyright regime 14 Metcalf s Law The value of a network increases with the square of the number of users Externality the behavior of an individual affects the utility of another Negative Externalities Smoking Pollution Positive Externalities Online games Web 2 0 Why 15 The value of something increases as Network Effects more people use it Examples Telephone system Software product Some IG exhibit network effects Does iTunes 16 Markets for Information Goods Traditional goods often have many competitors example retail Are there many competitors for information goods Operating systems Office productivity software Music downloads 17 Markets for Information Goods Monopoly or near monopoly suppliers are often a natural outcome in markets for information goods Considering the properties of information goods a monopoly could actually benefit customers Standards compatibility network effects Patents copyrights 18
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