Information good

Last updated July 05, 2023

Information goods are commodities that provide value to consumers as a result of the information it contains and refers to any good or service that can be digitalized.^[1] Examples of information goods includes books, journals, computer software, music and videos.^[2] Information goods can be copied, shared, resold or rented.^[3] Information goods are durable and thus, will not be destroyed through consumption.^[4] As information goods have distinct characteristics as they are experience goods, have returns to scale and are non-rivalrous, the laws of supply and demand that depend on the scarcity of products do not frequently apply to information goods. As a result, the buying and selling of information goods differs from ordinary goods. Information goods are goods whose unit production costs (including distribution costs) are negligible compared to their amortized development costs. Well-informed companies have development costs that increase with product quality, but their unit cost is zero. Once an information commodity has been developed, other units can be produced and distributed at almost zero cost. For example, allow downloads over the Internet. Conversely, for industrial goods, the unit cost of production and distribution usually dominates. Firms with an industrial advantage do not incur any development costs, but unit costs increase as product quality improves.^[5]

Common Trading Models

There are two common trading methods in information goods trading. Leasing model and selling model. Providers of information goods and services are increasingly adopting leasing models.

Leasing model: The user does not own it permanently but leases the information good or service from the provider and pays a fixed fee on a regular basis.^[6] For example, mobile music applications. Consumers pay monthly for listening rights to all songs on the platform.

Selling model: After prepaid, consumers can use it unlimited times.^[7] For example, games from game companies. Consumers can play the game regardless of the time and number of times after purchasing a game disc or network license.

Disadvantages of Information Goods

Piracy is one of the most important issues facing information service providers today. A report from the U.S. Government Accountability Office states that counterfeiting and piracy have a wide-ranging impact on consumers, industries, governments and the economy. Generally, it depends on the type of infringement involved and other factors. These include lost sales, lost tax revenue, damaged brand value, and reduced incentives to innovate. For example, the software industry may be one of the hardest hit. In 2011, the piracy rate of US software products was about 20%. That alone cost the American software maker a whopping $9.5 million in lost revenue.^[8]

In addition, social sharing of information goods involves buying and sharing a single good through a network of acquaintances such as friends or colleagues is also an important issue for suppliers of these goods.^[9] When customers buy an information good and send it to their friends or colleagues. The person who receives it does not need to buy it again. Although these actions do not involve piracy, it affects the sale of information goods.

Bundling Strategy

Although information goods can be copied in large numbers and sold after completion. But it can also be shared by customers who have already purchased it. Despite the growth of the Internet, the profits of information products will only decrease. As a result, producers started bundling. Bakos & Brynjolfsson (1999) found that Bundling large numbers of unrelated information goods can be surprisingly profitable because the law of large numbers makes it much easier to predict the value consumers place on bundled goods than if they were sold individually.^[10]

Versioning Strategy

Versioning is a method of implementing second-degree price discrimination through varying the quality of a product. This approach is particularly advantageous when it is not costly to downgrade an information good to create one or more lower quality versions ^[11] versioning involves a corporation offering its product in various versions and allowing customers to choose the one that suits them best. The goal for the corporation is to minimize expenses while meeting customer requirements as precisely as possible and matching the requested price to customers' willingness to pay. For information goods providers, producing different versions is relatively easy and cost-effective, especially for established products like a mail program or a communications portal. However, it's important to determine how many versions to offer. While it's theoretically possible to produce an individual version for each customer at a low versioning cost and achieve complete price discrimination, having too many product versions can be confusing for customers. The market should be able to easily distinguish between the performance differences of the versions to make informed purchasing decisions ^[12] The best way to version information goods depends heavily on their network externalities. However, even for products that have significant externalities, the decision to version should also consider other factors such as how exclusive the network is and the costs involved in versioning ^[13] Typically, vendors in proprietary networks benefit more from versioning than those in shared networks. For products that follow open standards or are compatible with other competing brands, vendors may consider reducing their versioning activities as it may not produce the desired benefits.

Economic theory

Information economics refers to a microeconomic theory that studies how information affects economic activities.^[14] An information marketplace differs from the market place of ordinary goods as information goods are not actually consumed and can be reproduced and distributed at a very low marginal cost.^[15] The unique characteristics of information goods complicate many standard economic theories.^[16]

Economic theories on information goods face the problem of dealing with two contradictory concepts. On one hand, information is regarded as an important economic resource for development as perfect information is a key requirement of the efficient-market hypothesis.^[17] As a result, complete information should be accessible and made available to everyone at no cost. However, actual markets often depend on information as a commodity, resulting in information goods.^[18] If information is a commodity, it will be potentially restricted in terms of access, cost, availability and completeness and thus, not be freely available.

Market failure

Information goods have a number of characteristics that contribute to market failure.^[19] Information goods have very high fixed costs of production but can be reproduced with zero or very low marginal cost which can cause difficulties in competitive markets.^[20] Improvements in digital technology have also allowed information goods to be easily reproduced and distributed.^[21] For example, it can cost over a hundred million dollars to produce a movie, while the movie can easily be recorded in the cinema or online and distributed inexpensively. Furthermore, information goods typically incur sunk costs which are not recoverable. While there are copyright and piracy laws making it illegal for consumers to copy and distribute information goods, it is often difficult to detect copying and distributing activities which makes it hard for authorities to prevent the illegal distribution of information goods.

As information goods are experience goods, consumers may be reluctant to purchase them as they are unable to accurately assess the utility they would gain from the good before purchasing it.^[22] As a result, information goods can suffer from adverse selection and result in a type of market failure known as the lemon problem, which is where the quality of the goods traded in the market can decrease due to asymmetric information between a buyer and seller.

Information goods are also public goods meaning that they are non-rival and sometimes non-excludable.^[23] This is because one person’s consumption of an information good does not reduce other people’s enjoyment of the same good or diminish the amount available to other people. Additionally, a person generally cannot exclude others from consuming an information good.

Methods to overcome market failure

Producers of information goods can engage in a number of strategies to address the market failure that arises. In order to address the market failure that arises as a result of information goods being experience goods, producers can provide consumers with previews so that they can partially experience the good prior to purchasing it.^[24] For example, movie producers will often release a movie trailer and synopsis so that consumers know what the movie is about before they watch it which influences their likelihood of purchasing the good. Another way producers of information goods overcome the experience good problem is through reviews.^[25] By reading reviews and testimonials on information goods, consumers can determine the quality of an information good and know what it is before purchasing it. Additionally, to prevent market failure, producers can establish and maintain their brand reputation.^[26] This is because if an information good has a well-established brand reputation, consumers will be inclined to purchase it even if they are unable to determine how much satisfaction they will gain from the good before experiencing it.

In order to prevent consumers from copying and distributing information goods, copyright and piracy laws make it illegal for consumers to copy and reproduce goods that they did not produce. Laws and regulations address the market failure that occurs due to information goods having returns to scale by imposing penalties on individuals who illegally reproduce information goods which prevents them from doing so.

Related Research Articles

Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as whole, which is studied in macroeconomics.

A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterised by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

<span class="mw-page-title-main">Network effect</span> Increasing value with increasing participation

In economics, a network effect is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive, resulting in a given user deriving more value from a product as more users join the same network. The adoption of a product by an additional user can be broken into two effects: an increase in the value to all other users and also the enhancement of other non-users' motivation for using the product.

<span class="mw-page-title-main">Externality</span> In economics, an imposed cost or benefit

In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's activity. Externalities can be considered as unpriced goods involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example. The cost of air pollution to society is not paid by either the producers or users of motorized transport to the rest of society. Water pollution from mills and factories is another example. All consumers are made worse off by pollution but are not compensated by the market for this damage. A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit. The third party is essentially getting a free product. An example of this might be the apartment above a bakery receiving the benefit of enjoyment from smelling fresh pastries every morning. The people who live in the apartment do not compensate the bakery for this benefit.

This aims to be a complete article list of economics topics:

<span class="mw-page-title-main">Price discrimination</span> Microeconomic pricing strategy to maximise firm profits

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different market segments. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a firm must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc. All prices under price discrimination are higher than the equilibrium price in a perfectly competitive market. However, some prices under price discrimination may be lower than the price charged by a single-price monopolist. Price discrimination is utilised by the monopolist to recapture some deadweight loss. This Pricing strategy enables firms to capture additional consumer surplus and maximize their profits while benefiting some consumers at lower prices. Price discrimination can take many forms and is prevalent in many industries, from education and telecommunications to healthcare.

In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice include telecommunications services, financial services, health care, information, and consumer electronics. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles many TV and movie channels into a single tier or package. The fast food industry combines separate food items into a "meal deal" or "value meal".

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product.

In economics and marketing, product differentiation is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as from a firm's other products. The concept was proposed by Edward Chamberlin in his 1933 book, The Theory of Monopolistic Competition.

Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise.

In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not transferable.

Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions.

A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.

In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the benefit or service?”

In economic literature, the term "aftermarket" refers to a secondary market for the goods and services that are 1) complementary or 2) related to its primary market goods. In many industries, the primary market consists of durable goods, whereas the aftermarket consists of consumable or non-durable products or services.

Tax shift or Tax swap is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others while keeping the overall revenue the same. The term can refer to desired shifts, such as towards Pigovian taxes as well as undesired shifts, such as a shift from multi-state corporations to small businesses and families.

Search costs are a facet of transaction costs or switching costs and include all the costs associated with the searching activity conducted by a prospective seller and buyer in a market. Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit. Search theory is a branch of microeconomics that studies decisions of this type.

Customer cost refers not only to the price of a product, but it also encompasses the purchase costs, use costs and the post-use costs. Purchase costs consist of the cost of searching for a product, gathering information about the product and the cost of obtaining that information. Usually, the highest use costs arise for durable goods that have a high demand on resources, such as energy or water, or those with high maintenance costs. Post-use costs encompass the costs for collecting, storing and disposing of the product once the item has been discarded.

The economics of digitization is the field of economics that studies how digitization, digitalisation and digital transformation affects markets and how digital data can be used to study economics. Digitization is the process by which technology lowers the costs of storing, sharing, and analyzing data. This has changed how consumers behave, how industrial activity is organized, and how governments operate. The economics of digitization exists as a distinct field of economics for two reasons. First, new economic models are needed because many traditional assumptions about information no longer hold in a digitized world. Second, the new types of data generated by digitization require new methods for their analysis.

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

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↑ Varian, HR 2000, ‘Buying, sharing and renting information goods’, The Journal of Industrial Economics, vol. 48, no. 4, pp. 473-488.
↑ Ibid.
↑ Raine, A 2002, ‘A model for buying and renting information goods incorporating incomplete information’, Honours thesis, University of Queensland, Brisbane.
↑ Roy, J.; Haim, M. (2011). "Information Goods vs. Industrial Goods: Cost Structure and Competition". Management Science. 57. no. 1: 164–176. ISSN 0025-1909.
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↑ Galbreth, M. R.; Ghosh, B.; Shor, M. (2012). "Social Sharing of Information Goods: Implications for Pricing and Profits". Marketing Science. 31. no. 4: 603–620.
↑ Bakos, Y.; Brynjolfsson, E. (1999). "Bundling information goods: Pricing, profits, and efficiency". Management Science. 45. no. 12: 1613–1630.
↑ Linde, F, 2009, ‘Pricing information goods’, Journal of Product & Brand Management, Vol. 18 No. 5, pp. 379-384.
↑ Shapiro, C. and Varian, H.R, 1999, ‘Information Rules. A Strategic Guide to the Network Economy’, Harvard Business School Press, Boston, MA.
↑ Jing, B, 2003, ‘Market segmentation for information goods with network externalities.
↑ Coiera, E 2000, ‘Information economics and the internet’, Journal of the American Medical Informatics Association, vol. 7, no. 3, pp. 215-221.
↑ Ibid.
↑ Allen, B 1990, ‘Information as an economic commodity’, American Economic Review, vol. 80, no. 2, pp. 268–273.
↑ Evans, PB & Wurster, TS 1997, ‘Strategy and the new economics of information’, Harvard Business Review, vol. 75, no. 5, pp. 71-82.
↑ Ibid.
↑ Varian, HR 1998, Market for information goods, Institute for Monetary and Economic Studies, Tokyo.
↑ Nabipay, P 2018, ‘Essay on economics of information goods’, PhD thesis, University of Minnesota, Minneapolis.
↑ Varian (n 10).
↑ Ibid.
↑ Ibid.
↑ Ibid.
↑ Ibid.
↑ Ibid.