|
Solveig Singleton has written on the marginal cost fallacy, whereby the lowering of transactional costs, enabled by technology, should decrease prices to zero. Such a Newtonian world, Solveig reminds us, was never implied by Coase to exist. Especially with the central characteristics of the digital innovation economy, the heavy upfront capital, investment and risk needed to create digital goods; transaction costs may drop, but overall costs of bringing a product to market stay far above margin, thus prices will not fall that close to zero.
So, what explains the persistent error of those who apply the marginal cost argument to technological products and arrive at the conclusion that things should be free? Well the answer has two prongs- one dealing with consumers misconceptions, the other with policy reasoning errors.
Regarding consumers and Coase's theorem, several scholars from USC, The University of Chicago and Columbia University argue that the cost structure of information products leads otherwise honest and law abiding citizens to set aside common economic sense. Joseph Nunes, Christopher Hsee, Elke Weber, Why Are People So Prone to Steal Software? The Effect of Cost Structure on Consumer Purchase and Payment Intentions, Journal of Public Policy and Marketing, Vol. 23, No. 1, 2004. A major change that the computer era and information age has brought about is in the products that all consumers see and use. .. products consist almost exclusively of IP, which includes software, music CDs, digital videodisc movies, and a host of products and services available online. A key difference between these information products and tangible, material products is often the cost structure. Information products typically have a relatively high fixed costs and little or no variable costs…
According to the article, consumers are likely to steal when a unit of a good is cheap to manufacture and distribute, when they do not readily perceive the backend costs of creating the product in the first place. The popular rivalrous/nonrivalrous anti-IP motto can be understood as not considering this latter fixed cost, which can seem non-existent when you're looking at a software or music CD. The article goes on and suggests that to deter piracy, IP companies should communicate their high-fixed costs to consumers and thus convey a clearer sense of a product's total costs. … consumers believe that they are less obligated and thus are less likely to pay voluntarily for a high-fixed cost (capital necessary for R&D and other investments), low-variable cost (that necessary to manufacture and distribute) product (e.g., software) than for a high-variable cost, low- fixed cost product (conventional tangible products) …
… the less harm that consumers believe the seller would incur from their failure to pay, the less likely they are to pay for a product. .. consumers believe that they bring about less harm when their failure to pay prevents a seller from recovering fixed costs than when it prevents a seller from recouping variable costs. This is partly because a product’s fixed cost is not easily attributable to individual consumption... Finally, the policy reasoning of IP opponents, to prove that Coase’s Newtonian world exist, resembles blind twisting and turning. They prove the point that if you have a bad thesis or goal in writing, your arguments may come out tortured. These include: the non-importance of capital in innovation, that since piracy is inevitable it should be allowed to grow to a grand-scale, how team spirit is more important than regulatory means of appropriation, expanding “economic activity” so far it loses all meaning, putting religous value in artists selling ads and t-shirts rather than DRMd content. Even more far fetched, I imagine the very definition of innovation might be changed so that it only encompasses innovation in business processes, such as FOSS peer development, rather than innovation in products (the Blackberry, Windows OS, etc)- an economically untenable view.
posted by Noel Le @ 8:00 AM | Markets: Business, Investment & Innovation
Link to this Entry |
Printer-Friendly |
Email a Comment | Post a Comment(4)
|
