LECTURES

INFORMATION IS A DIFFERENTIATED PRODUCT. HOW?

1. Info that I receive via the radio is not the same as info that I receive via a CD.

2. Even when the info itself is identical (newspaper on paper, or on the Net), the conditions surrounding its sale and use often arequite different.

3. Key Characteristics of Information (Magic 13!)

• Reliability. A physicist may know more about nuclear bombs than a taxi driver.
• Usability (Is the Web site easy to use)
• Compatability (Can you use the software on DOS? Microsoft is famous for making it difficult to use WordPerfect or Quattro Pro files in Windows.)
• Subject to a Variety of Externalities, e.g., network

*External Network Economies: The more individuals using e-mail, the more useful it is. Ditto fax machines. (This is why I might distribute some technology and software free.) This often tends to produce a single dominant firm or single technical standard.

*External Network Diseconomies: Congestion.

• Subject to economies of scale and scope.
• Often can be reused or reconsumed over and over again, e.g., music on a CD.
• Can be copied and reproduced easily. E.g., the cost of copying a CD is very small, even if you are copying on to a blank CD.
• Value dependent upon highly individualized preferences. I may like info about HipHop artists, while you may like info about Beethoven.

(Note: Because the values that individuals place upon the same info are often so different, info goods are primecandidates for differential, discriminatory pricing where you and I pay very different prices for the same good.)

• May Have a Time Dimension. Crop info. Stock market info. Football scores. Last week’s newspaper, on the other hand, ordinarily has much less value.
• Often Can Be Archived or Stored. E.g., past stock market prices; baseball performances; purchases from Lands’ End.
• Often Can Be Altered Very Easily, e.g., a document in WordPerfect. This means that it is constantly being created and recreated and that sometimes it is difficult to determine who owns it.

(E.g., Who, if anyone, receives a copyright to specific music? What if I go into a studio and make my own version of Elvis Presley's "Heartbreak Hotel?" How different must it be before it isn't Elvis' music?)

• Inspire Questions Concerning Intellectual Property. Because it is easily created, recreated, transmitted, and duplicated, questions of intellectual property rights are among the most important in the information arena. (This is what the Napster, Gnutella, Kazaa, Morpheus
  argument is all about.)
• Often Is Somewhat Indestructibleand last a long time. This is the famous durable goods problem cited by Ronald Coase ("Durability and Monopoly," JLE, 1972).

* This often means that information firms are competing with themselves and their own
past sales.

* Textbook publishers often try to deal with this by coming out with a new edition!  (Editions, updates). Planned obsolescence. But, consumers will ignore this if you have a history of putting out new versions that aren’t lots better. Microsoft has this problem with versions of Windows.

* Textbooks are perhaps a counterexample if faculty force on students!

* Some info producers will sell licenses, e.g., to software and attempt to prevent copying.

* May lease the good (which is what IBM used to do with mainframe computers) so that consumers have to turn it back in when finished.

* May encrypt the digital info.

* Try to discourage second hand sales.

* May restrict supply and heavily invest in reputation, e.g., the DeBeers Diamond strategy.
Problem with this is that you are vulnerable to other suppliers. In 1994, the Russians
flooded the diamond market, making it very tough for DeBeers. In 1996, however, they reached an agreement to restrict.

* May put item on sale for a limited duration. E.g., Disney put videos of Snow White, Bambi, and the Fox and Hounds on sale in 1997 for two months. Had to convince purchasers that this was really the way it would be. They did well (400% increase in sales of these). But, even then, they face the second hand market and the video store market.

(Alcoa controlled 90 percent of the market for new aluminum. But, used aluminum could be
recycled. A Coase Problem. But, Alcoa contrived to control the supply of scrap aluminum available for recycling as well. Judge Learned Hand ruled it a monopoly in 1945.)

* May utilize technological tricks. E.g., a PDF file that can be printed out, but not altered, and not saved. Or, a "read only" file. Or, code that prevents copying of a CD.

Of course, paper newspapers are an example of digital information that is destructible, though their digital counterparts aren't. They don’t compete much with their past production.

* In such situations, firms may do intertemporal price discrimination, gradually decreasing price over time. Initially supply only those consumers with a really high desire to purchase. Then, "walk down the demand curve."

* May do a "best price" agreement. You pay me the high price now, and I’ll give you the benefit of any lower price that comes along later, say within the next six months, as GE and Westinghouse did on turbogenerators in the 60s.

* But, nearly everything that is digital faces the Coase Problem. E.g., consider the owners
of music. How do you control what is done with your past output (CDs) and sales?
Coase points out that the durability of a good can diminish or even eliminate monopoly
power in "the twinkling of an eye." Depends how patient buyers are and how high their
price elasticities are.