Economics of Information

1
Economics of Information

• Economics 235
• David G. Loomis dloomis_at_ilstu.edu

2
Questions concerning Content

• How do producers price information/content?
• Are all movies worth the same price?
• Is all music worth the price of a CD?
• Is a newspaper worth the same on a slow news day
  as on 9/12?
• How do consumers evaluate the price of content?

3
Characteristics of Information

• Information is a public good.
• Benefits may be provided to all people at no more
  cost than required to provide it to one person
• Benefits are non-rival in consumption
• Benefits are indivisible
• People can't be excluded from using it (easily)

4
Characteristics of Information

• Information is an experience good.
• Before consumption, consumers have a hard to
  determining an exact value on the utility of
  consumption
• Consumers must experience it to value it.
• To estimate value, consumers use branding,
  word-of-mouth, and signaling as clues

5
Costs of Information

• Information is costly to produce and cheap to
  reproduce
• Production of an information good involves high
  fixed cost and low variable costs.
• Most of fixed costs of producing information are
  sunk costs costs that are not recoverable if
  production is halted

6
Costs of Information

• Once the first copy of an information good has
  been produced, most costs are sunk.
• Multiple copies can be produced at roughly
  constant per-unit costs
• No natural limits for additional copies
• Print books and journals are protected because of
  reproduction costs but there is none for
  electronic information.

7
The Long Tail

• The Long Tail by Chris Anderson (Hyperion 2006)
• No longer need a hit song or movie because the
  cost of distribution have come way down
• Rhapsody and Amazon can carry many more books and
  songs than a regular retailer.

8
The Long Tail

• Rhapsody carries 1.5 million tracks and virtually
  every single one will sell/ Walmart 55,000
  tracks
• Netflix 55,000 DVDs / Blockbuster Store 3,000
  DVDs
• Amazon 3.7 million books / Borders bookstore
  100,000

9
Four reasons to sell to groups

• Price Sensitivity
• Network effects
• Lock-in
• Sharing

10
File Sharing

• Does file sharing reduce the sales of CDs?

11
Latest Research

• Oberholzer/Strumpf, The Effect of File Sharing
  on Record Sales An Empirical Analysis, March
  2004 says NO!