Many of the markets that most fascinate microeconomists concern information technology. Information has a strange economic property in that the marginal cost of getting a piece of information to an extra person is now zero. This change is because new forms of dissemination — via the Internet — have taken away the cost of shipping items as books, records, video tapes (remember them!), and boxed floppy discs of software. Therefore, as Hal Varian, Google’s chief economist puts it, information is expensive to create and cheap to reproduce.
That reality has transformed many industries and forced people to look at possible solutions to the high cost of information creation. You see, if making the information costs a lot — economists call these first copy costs — it makes recouping your money very difficult when the price is heading toward marginal cost — zero.
Creators can rejoice in some good news, though; many possible solutions exist to the problem. Alongside advertising — which was about the first solution entrepreneurs thought up during the early years of television — you can often find a related (or tied) product that consumers are willing to pay for and sell this for a price greater than zero, using the revenues from selling this product to subsidise the one you give away for free.
One method that software companies have adapted is to move to subscription models or to sell their consulting services and give the product away for free. One globally popular British heavy metal band is rumoured to use data to find countries that pirate its records heavily and tour there, making money from concerts where it can’t from records. If true, economists would find this approach eminently sensible!
In contrast, one solution that economists view with strong scepticism is using technology to restrict the ability to copy your product. When you think that copying may have utility for a consumer, copy-protecting the legal version of the product can very well end up making the illegal copy — relatively — more valuable! Funnily enough, most of the online music and video stores went through an experiment of doing just that. In almost no case has the approach lasted.
