Economics of Digital GoodsBY - AAKASH KHANDELWAL (IPG 2012001)

ABV- Indian Institute of Information Technology and Management Gwalior

Digital goods

Bit strings, sequences of 0s and 1s, which have economic value. They are not just technologies to improve productivity on the

supply side of an economy. Any copy of a digital good is the good itself. There is no distinction between an original and a copy

Kinds of Digital GoodsKinds of digital goods IllustrationsSearchable databases Restaurant guides, phone booksDynamic information Financial quotes, newsOn-line magazine and newspapers International, national, regional; general

and special interest publicationsReports and documents Easy multiplication and indexingMultimedia objects Music, video files, texts, and photosInformation services Offerings by travel agencies, ticket

agencies, stock brokeragesSoftware Off-the-shelf products, customized

productsInteractive services On-line forums, chat rooms, telephone call,

games

Characteristics of Digital goods

Non-Rival Infinitely Expansible Discrete Aspatial (weightlessness and spacelessness ) Recombinant

Economic nature of digital goods: how technology, characteristics and behavior interact.

Digital goods are fully replicable (can be copied without loss of quality or information).

The content of a digital good may be such that its actual value can only be fully realized once the good has been consumed. Thus, in addition to being public and durable, some digital goods are alsoexperience goods. (music, films, books, etc.

Public Good

A product that one individual can consume without reducing its availability to another individual and from which no one is excluded.

Economists refer to public goods as "non-rivalrous" and "non-excludable".

Economic Properties of Digital Goods – General Behavior

Digital goods are indestructible or nonsubtractive, meaning that they are not subject to wearing out from usage, which can often occur in the case of physical products.

Easily transmutable; manipulation of digital products is easier . Digital goods are easily and cheaply reproducible. Digital goods, especially information and content products, are often

classified as public goods. Public goods share two main characteristics: nonrivalry and nonexclusiveness in usage.

Nonrivalry is a product feature normally given in the case of digital goods due to low costs and ease of reproduction. Nonexclusiveness is a feature of the legal system.

Economic Properties of Digital Goods – Cost and Production

High fixed costs (first copy costs), dominated by sunk costs, and by low variable and marginal costs.

Digital goods can be copied at almost no cost and can be transmitted with minimum delay to almost everywhere. This copying of digital products at almost no marginal costs.

Value Paradox: Only when products are well known and highly in demand are they attributed a high value and the possibility of generating revenues.

Customers are only willing to pay for “scarce” products. Reinforced by limited editions and individualization of the copies

(e.g., through watermarking) or other restrictive measures.

Digital goods are durable goods – Introduction From durable to infinitely durable the media used to store digital

goods are durable but not infinitely durable. CDs and DVDs – high life expectancy

Floppy discs, hard-drive and tapes – low life expectancy This potential infinite durability is a particular characteristic of digital

goods and no other good in the economy, apartfrom information and land, is thought to have such a property.

Although the medium used to store and distribute a digital good is finitely durable, the digitalgood itself is potentially infinitely durable, provided that it is transferred onto a new medium before the current onefails.

Digital goods are durable goods – Effects The immediate expected effect of such durability is a progressive

decrease of the demand. Durability and loss of market power

A Durable good may lead to a total loss of market power for the firms producing it.

The economic impact of the durability of digital goodsIf the durability of digital goods cannot be reduced, consumers are likely to expect a decrease in price and to defer their purchase.Public nature of digital goods tends to aggravate the problem, since consumers,while they wait for prices to drop are, nonetheless, able to consume illegal versions of the goods.New versions of software and operating systems are released, making the previous version obsolete andpushing consumers to renew their purchase.

Digital goods are experience goods

Experience goods are goods whose qualities cannot be determined prior to purchase. There are two circumstances in which a good is considered an experience good:

either when full information on the main attributes of the good cannot be known without direct experience

when the search for information about the main attributes is more costly or difficult than experiencing the product directly.

Examples - music, movies, software or books Digital goods are experience goods is not an intrinsic property of

these goods, but is, instead related to their content.

All durable goods can be considered as experience goods, since the more a good is durable, the more it is likely to be regarded as an experience good by consumers. Since digital goods are infinitely durable, they can all be considered as experience goods, regardless of the nature of the content of the good itself.

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