As an add-on to Solveig's The Marginal Cost Fallacy, Again, a couple of years ago the Competitive Enterprise Institute put on a conference on Declining Marginal Cost Industries in the Global Information Age. The materials and a transcript are available at the link, including interviews with Ronald Coase and Lester Telser. Industries discussed included the digital media, network, pharmaceutical, and transportation industries.

It is an important topic for IP -- see this discussion of Marginal Costs and Intellectual Property, by Prof. (and IPCentral Academic Advisor) John Duffy.

This blog's contemporaneous characterization of the CEI event was:

As noted before in this WebJournal, the notion that "economic efficiency requires" that prices "should" equal marginal cost is a treacherous one. It leads people into such logical traps as arguing that because intellectual creations can be distributed over the Internet at almost zero cost, we should abandon the market system for IP and support its production by some system of fees on hardware and/or connectivity, combined with zero-price distribution.

In fact, the idea that marginal cost pricing represents a desirable state of affairs, from the standpoint of either economics or ethics, is an academic affectation, with little relevance outside the classroom. It has no application to price-setting in investment-heavy industries, a category which, in the modern economy, encompasses practically everything.

It most emphatically has no relevance to creative products, where producing the first copy of a movie, song, book, program, game, or drug may cost hundreds of millions of dollars, while producing each subsequent copy costs only pennies.

In this real world, producers must avoid the death spiral of marginal cost pricing, and must direct considerable ingenuity to this end, through bundling, differential pricing, varying product composition, and other devices. The danger is that government regulatory and antitrust authorities, or judges, caught up in the myth of marginal cost, will interfere with these necessary and benign efforts to accommodate reality.

posted by James DeLong @ 7:48 AM | DRM & Watermarks, etc., Markets: Business, Investment & Innovation

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