The traditional solution to the problems posed by knowledge production is the establishment of property rights over knowledge that re-protects the producer. (Patents, author rights, copyrights)
However, the legal framework for many goods and services provided over the Internet has not yet been fully established. Therefore, the entry and imitation costs are very low.
Therefore, manufacturers must build up the necessary market power to use knowledge profitably through other mechanisms. These mechanisms should ensure that producers of information goods create a framework of imperfect competition around their activities.
We can see the results of the specific nature of information products through three mechanisms that show the development of activities on the web:
- Subscription. The ability to duplicate and combine goods at almost zero cost justifies selling a large basket of information goods for a fixed subscription. This, in turn, can encourage market concentration.
- Reputation. Exchange of information goods requires a relationship of trust between buyer and seller. This is why building and maintaining a reputation is probably more important to success on the web than in most traditional industries.
- Commitment. Lower interaction costs make it possible to customize services and ask consumers to invest in the relationship with the information provider to build loyalty.
Dissemination of Information Products
The emergence of the Internet and its scope for information markets highlight some theoretical contributions that seem less important in the context of traditional markets.
In this article, we show one of the phenomena that occur in the context of imperfect competition for information goods. This consists in the tendency to group goods into large baskets.
It is clear that no one uses all the elements of the basket. To take another example outside the context of the Internet, television channels offer program packages instead of the much less sophisticated pay-per-view.
Why is selling a basket better than setting a price per service and letting consumers choose their service? The first answer was given in the 1980s studies: using baskets provides a better possibility.
A firm offering information products can segment the market by offering several baskets of different compositions.
As such, it offers several subscription types with a final, free print version, including online access to all articles, one with a basket of online access, and online access to a number of articles.
This first point is evident in the example below where there are two goods where half of the consumers are worth (3.0) and the other half (1.3) respectively:
- If the two items are sold separately, the seller bids the first item at 3 prices and the second item at 3 prices and drives a maximum of six people away from the consumer. It sells at 4 and also offers the first item it sells by itself at 3.
One argument for selling baskets is that demand for a basket of goods may be less price sensitive than demands for a component of the basket each.
It is the average of the value of all goods that determines the profit for each item of the basket. Because the average is easier to estimate, the firm has better information about the demand for the cart rather than the demands for each item.
Especially if the values are independent and large enough, the law of large numbers guarantees the firm a risk-free profit per item. This provides more profit than separate sales if priced in a certain way.
Therefore, it may be more profitable for the seller to sell a basket of information goods than to sell each piece of information at retail price.
This effect works outside of any psychological notion that consumers prefer to subscribe to a service rather than succumb to a micropayment system.
How is this analysis more suitable for information assets?
Basically, in the case of the production of physical goods, production costs strongly limit the application of the result.
At high variable costs, even if the basket allows to increase revenue, it is much more costly to produce since all goods must be produced. However, this effect is almost non-existent for an information good with zero replication costs.
Especially if the number of goods is high and the marginal cost is zero, and the monopoly price separately for each good is below the average value, the monopoly wins by creating a basket. The total produced is higher with this basket. But it is seized by the monopoly to the detriment of consumers.
In the context described above, it shows that competition between sellers of information goods will not take place at each level of information goods, as a perfectly competitive regime would.
Competition will be at the level of baskets of goods and the winner is the collection of information goods and the market is segmented according to each individual's propensity to pay.
Also, if a new information good appears on the market, it can be obtained from a seller's use of that good.
They indicate that this value is higher because the size of the basket originally offered by this seller is large. The analysis therefore suggests that sites that offer the best baskets of information products will strengthen their dominance.
The aggregation process clearly has limits (expertise gains, complexity, correlations of values, etc.). However, this type of analysis highlights the forces pushing towards concentration of the information market.