Marginal cost of zero or substitute goods?

(Or how I learned to stop worrying and love economics)

Dr. Strangelove (Or how I learned to stop worrying and love the bomb)

(Update 07/04/2008 – See this post for a plain english version)

I have one hour to spare

Do I:

Listen to a live broadcast in the hope of serendipity or the podcast I have lined up?

Click on the YouTube and DailyMotion links I have in an email or go to the on-demand offerings from the broadcasters to catch the programme I missed last night?

Follow the links in a story I’m reading online or do I catch up on the RSS feed?

Post a blog entry or update my Flickr photostream?

Listen to the podcast or watch the YouTube/DailyMotion videos?

Read the links in the story or update my photostream?

In economic terms:

Is it that all digital information must be free or that all digital goods are perfect/imperfect substitutes and if one is free then this is your price floor?

Is it the average cost versus the marginal cost of a digital item or the average cost of one item versus the marginal cost of another where all goods are perfect/imperfect substitutes?

Is one digital good a perfect substitute for another or is it that the scarce resource is time and the choice of goods determined by the lowest barrier to entry where goods are imperfect substitutes but the means of delivering them makes substituting one for another more advantageous than the pursuit of the original?

What value can you add to a perfect/imperfect substitute to make it a complementary good?

So:

What is really happening with the convergence of electronic appliances is not necessarily the shifting of all content to one platform but the freedom to substitute one digital good for another, both of which are in competition for the scarce resource – time.

The marginal cost of production – where a digital reproduction is claimed to have a zero marginal cost, as you still have the original but I have a perfect copy for free, as the cost of storage heads to zero, – is missing the point as far as I’m concerned.

I don’t wish to consume something only because it is free.

When the substitutable alternatives available to me are free of cost but require my investment of time then I have no incentive to add a monetary cost to the equation.

If what you have to offer costs me in monetary terms and time then you need to add value in a way that turns the substitute good into a complementary one.

The trick is to recognise who in the market are playing by the economic rules (mostly the consumers on the Internet) and who are seeking protectionist measures (mostly the rights holders – DRM etc.) and to show those seeking protection from the market how rational the market actually is behaving and that if they innovate, they can reposition themselves from being protectionists in a declining business model to being on the growth curve in a new business model.

Links for substitute goods:
http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=S#substitutegoods
http://en.wikipedia.org/wiki/Substitute_good
http://www.economicswebinstitute.org/glossary/substitute.htm

Links for complementary goods:
http://www.economist.com/research/Economics/alphabetic.cfm?letter=C#complementarygoods
http://en.wikipedia.org/wiki/Complement_good

Links for marginal cost
http://www.econmodel.com/classic/terms/mc.htm
http://www.economist.com/research/Economics/alphabetic.cfm?letter=M#marginal
http://en.wikipedia.org/wiki/Marginal_cost

Links for average cost:
http://www.econmodel.com/classic/terms/ac.htm
http://www.economist.com/research/Economics/alphabetic.cfm?term=average#average
http://en.wikipedia.org/wiki/Average_total_cost

2 responses

  1. […] my original post – which induced a lot of head scratching – I’ve revisited this idea in more […]

  2. […] https://digitalrightsmanifesto.wordpress.com/2008/03/28/marginal-cost-of-zero-or-substitute-goods/ What is really happening with the convergence of electronic appliances is not necessarily the shifting of all content to one platform but the freedom to substitute one digital good for another, both of which are in competition for the scarce resource – time. […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: