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Markets for Information Goods

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Markets for Information Goods IMES DISCUSSION PAPER SERIES Markets for Information Goods Hal R. VARIAN Discussion Paper No. 99-E-9 INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN C.P.O BOX 203 TOKYO 100-8630 JAPAN NOTE: IMES Discussion Paper Series is circulated in order to stimulate discussion and comments. Views expressed in Discussion Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or the Institute for Monetary and Economic Studies. IMES Discussion Paper Series 99-E-9 May 1999 Markets for Information Goods Hal R. VARIAN* Abstract Economic theory has argued that "information" poses serious difficulties for the proper functioning of neoclassical markets. However, real markets seem to deal with it rather well, since real markets are much more creative than those simple competitive markets studied in Econ. 1. Information is an experience good, exhibits returns to scale, and public good properties, and all of these would seem to cause difficulties for market transactions. However, each of these issues can be dealt with: (1) there are practices such as previewing, browsing, and reviewing, which overcome the experience good problem; (2) product differentiation and/or price discrimination help deal with the returns to scale problem; and (3) intellectual property laws allow information goods to be excludable. Because information overload is becoming a serious problem, we will have to seek creative solutions such as recommender systems and/or intermediaries for filtering information. There will be an increased demand for information management specialists. Key words: Information good, Experience good, Returns to scale, Previewing, and browsing, excludability, intellectual property JEL classification: D40, H40, L80 * University of California, Berkeley gontents I henition of informtion go o d I P snformtion s n eonomi go o d I Q snformtion s exp eriene go o d P QFI reviewing nd rowsing XXXXXXXXXXXXXXXXXXXXX P QFP eviews XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX P QFQ eputtion XXXXXXXXXXXXXXXXXXXXXXXXXXXX Q R eturns to sle Q S snformtion s puli go o d R SFI ionomis of intelletul prop erty XXXXXXXXXXXXXXXX S SFP oftwre ptents XXXXXXXXXXXXXXXXXXXXXXXXX U T yther wys to del with exlusion V U erms nd onditions W V iry W W snterntionl onerns W WFI s opyright pirte XXXXXXXXXXXXXXXXXXXXXX II IH yverlod IP II fusiness mo dels IR IP snstitutions IT wuh hs een written out the diulties tht informtion4 p oses for neo lssil eonomisF row ironi tht sgi|informtionD ommunitionD nd entertinment|now omprises the lrgest setor in the emerin eonE omyF sf informtion p oses prolems for eonomi theoryD so muh the worse for eonomi theoryX rel mrkets seem to del with informtion rther wellF his prdox is the entrl theme of this essyX informtionD tht slipE p ery nd strnge eonomi go o dD isD in ftD hndled very well y mrket institutionsF he reson is tht rel mrkets re muh more retive thn those simple omp etitive mrkets studied in ion IF he ft tht relElife mrkets n hndle go o d s prolemti s is testment to the exiility nd roustness of mrket institutionsF I henition of informtion go o d vet us rst seek generl hrteriztion of the sgi eonomyF he si unit tht is trnsted is wht s ll informtion go o dsF4 s tke this to e nything tht n e digitized| o okD movieD reordD telephone onverstionF xote refully tht the denition sttes nything tht n e digitizedY s don9t require tht the informtion tul ly e digitizedF enE log representtionsD of informtion go o dsD suh s video tp esD re ommonD though they will likely eome less so in the futureF sn this essy s will not e very onerned with symmetri informtionF his topi hs een delt with extensively in the literture nd s hve little to dd to the stndrd tretmentsF snstedD s wnt to fo us on informtion s go o d|s n o jet of eonomi trnstionsF P snformtion s n eonomi go o d snformtion hs three min prop erties tht would seem to use diulties for mrket trnstionsF ixp eriene go o dF ou must exp eriene n informtion go o d efore you know wht it isF eturns to sleF snformtion typilly hs high xed ost of pro dution ut low mrginl ost of repro dutionF I uli go o dsF snformtion go o ds re typilly nonErivl nd sometimes nonexludleF e will del with these topis one t timeF Q snformtion s exp eriene go o d ou n only tell if you wnt to uy some informtion one you know wht it is|ut y then it is to o lteF row n one trnst in go o ds tht you hve to givewy in order to show p eople wht they rec here re severl so il nd eonomi institutions tht re used to overome this prolemF QFI reviewing nd rowsing snformtion pro duers typilly oer opp ortunities for rowsing their pro dE utsX rollywo o d oers previewsD the musi industry oers rdio rodstsD nd the pulishing industry oers o okstoresD nowdys omplete with esy hirs nd ppuinosF yne of the gret diulties fed y sellers of inforE mtion on the snternet is guring out wys to rowse the pro dutsF ideo nd previews work wellD ut it pp ers tht previewing textul informtion would e quite diultF roweverD things re not quite s d s they seemF he xtionl edemy of ienes ress found tht when they p osted the full text of o ok on the eD the sles of those o oks wentupy ftor of threeF osting the mE teril on the e llowed p otentil ustomers to preview the mterilD ut nyone who relly wnted to red the o ok would downlod itF ws ress hd similr exp eriene with monogrphs nd online journlsF QFP eviews enother wytooverome the exp eriene go o d prolem is for some eonomi gents to sp eilize in reviewing pro duts nd providing these evlutions to other p otentil onsumersF his is esp eilly ommon in the entertinment industryX lm reviewsD o ok reviewsD nd musi reviewers re uiquitousF fut reviews re lso found in the purer sort of informtion go o dsF he most demi p opulr pp ers @s mesured y ittionA re typilly surveys P sine the sp eiliztion required for frontier work in the sienes hs reted demnd for suhoverviewsF eer review is the stndrd tehnique used in the sienes for evluting the merit of pp ers sumitted for pulitionD while most humnities use demi presses to provide similr funtionF his institution survives euse it meets n imp ortnt needX evluting informtionF QFQ eputtion he third wy tht pro duers of informtion go o ds overome the exp eriene go o d prolem is vi reputtionF s m willing to purhse the l l treet tournl to dy euse s hve red it in the pst nd found it worthwhileF he tournl invests hevily to estlish nd mintin its rnd identityFpor exmpleD when it strted n online editionD it went to gret lengths to rete the sme lo ok nd feel4 s the print editionF he intent ws to rry over the reputtion from the oEline edition to the online versionF snvesting in rnd nd reputtion is stndrd prtie in the informtion izD from the wqw vion to the ime mgzine logoF his investmentis wrrnted euse of the exp eriene go o d prolem of informtionF R eturns to sle snformtion is ostly to pro due ut hep to repro dueF st n esily ost over hundred million dollrs to pro due the rst gh of rollywoo d lmD while the seond gh n ost well under dollrF his ost struture|high xed osts nd low mrginl osts|use gret diulties for omp etitive mrketsF st9s even worse tht thtF he xed osts for informtion go o ds re not just xed|they re lso sunkF ht isD they typilly must e inurred prior to pro dution nd usully re not reoverle in se of filureF sf the movie omsD there isn9t muh of mrket for its sriptD no mtter how muhit ost to pro dueF gomp etitive mrkets tend to push prie to mrginl ostD whihD in the se of informtion go o dsD is lose to zeroF fut this leves no mrgin to reover those huge xed ostsF row is it tht informtion n e sold t llc Q he ovious nswer is tht informtion is rrely trded on omp etitive mrketsF snstedD informtion go o ds re highly dierentitedF ih p op gh is dierent thn the others @or so the listeners thinkAD nd eh movie is uniqueF fut not too uniqueF here is still n dvntge in enourging some similritiesD due to the reputtion eet desri ed erlierF he mrket struture for most informtion go o ds is one of monop olisti omp etitionF hue to pro dut dierentitionD pro duers hve some mrket powerD ut the lk of entry restritions tends to fore prots to zero over timeF he ft tht informtion go o ds generlly hve some degree of mrket power lso llows pro duers to reover xed osts through more retive priing nd mrketing rrngementsF rie disrimintion for informtion is ommonX dierent groups of onsumers py dierent priesD nd qulity disrimintion is ommonpleF ulishers rst issue o ok in hrdk nd thenD yer lterD in pp erE kF pilm ome out rst for thetersD then thenD T months lterD on videosF snvestors py one prie for rel time sto k pries nd nother muh lower prie for delyed priesF sn eh of these exmplesD the sellers use dely to segment in the mrket y willingness to pyF here re mny other dimensions long whih one n version4 informE tion go o dsF hpiro nd rin IWWV desri e severl of these dimensions inluding delyD user interfeD onvenieneD imge resolutionD formtD pE ilityD feturesD omprehensivenessD nnoyneD nd supp ortF S snformtion s puli go o d e pure puli go o d is oth nonrivl nd nonexludleF xonrivl mens tht one p erson9s onsumption do esn9t diminish the mount ville to other p eopleD while nonexludle mens tht one p erson nnot exlude nother p erson from onsuming the go o d in questionF glssi exmples of pure puli go o ds re go o ds like ntionl defenseD lighthousesD rodstsD nd so onF he two prop erties of puli go o d re quite dierentF xonrivlness is prop erty of the go o d itselfX the sme mount of defenseD lighthouse servies nd rodsts re ville to everyone in the region served y the very nture of
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