Tomaž Turk:The Market Dynamics of Digital Content

Digital content

• The user view of digital technology

• Information markets• The role of libraries• Price for access to digital content• Spam economics • Copyright - the price of creativity

ESPOSITO, Joseph J.: The Processed Book. First Monday, 8 (2003), 3 (URL: http://www.firstmonday.dk)KENNEY, Anne R.: Digital to Microfilm Conversion: A Demonstration Project 1994-1996 (URL: http://www.library.cornell.edu/preservation/com/comfin.html, 7.1.2004)KINGMA, Bruce R.: The Economics of Information: A Guide to Economic and Cost-benefit Analysis for Information Professionals, Libraries Unlimited, Englewood, 2001.PHILLIPS, Fred Y.: Market-Oriented Technology Management. Berlin: Springer, 2001.SCHIFF, Frederick: Business Models of News Websites: A Survey of Empirical Trends and Expert Opinion. First Monday, 8 (2003), 6 (URL: http://www.firstmonday.dk)

New technologies, digital content

• Higher productivity at low costs• Variable cost of digital content are

relatively low (in comparisson to fixed costs)• Marginal cost of one copy (access to digital

content) are relatively low for access provider and for user

• Digital content is a public good (its consumption is not constrained to one user or one usage)

Classic or digital? The user view

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web publication

a classic journal

Classic vs. digital media access costs from a user perspective.

The user respects his/her fixed costs as well.

The price for a digital content - a fee

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demand

marginal cost of one access (for provider)

A

BThe price sets at marginal costs, but only on a perfect market. What about low marginal costs of information goods?A fee for access should cover the total costs.

A - a deadweight loss - the price is too high; an additional copy provides 0,20 Euros of marginal benefit, which is more than its marginal costs.

Access fee

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number of accesses

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A

Equilibrium at 10,000 accesses.

How to charge for access?

Access fee

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number of accesses

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marginal cost for clients

A

marginal cost for clients

If the charging system is expensive

and inefficient, there is a

deadweight loss on the market.

The cost of charging.

Access fee

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marginal cost for customers

A

Fortunatelly, new technologies enable higher

productivity and efficient charging

mechanisms.

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number of books (Millions)

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Market for books and journals The market for books and

journals represents the supply from publishers and the demand from individuals and libraries. Libraries are providing arround 5 % of quantity demanded, but they value books and journals at a higher level (since they represent the demand for all of their patrons).

The sketch shows the equilibrium point, where the optimal level of books and journals is provided and demanded in a given society.

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number of books (Thousands)

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demand

Demand for books by libraryAn individual library's demand curve is a sum of demand curves of its patrons.

For example, if the price for a book would be 40 Euros, the quantity demanded from this library would be 30,000 pieces.

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Demand for books by librarySince the market price for a book is 30 Euros, the library is interested in higher number of titles.

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Market for books and journals

Can library effectively estimate the value of books and journals for its patrons?

If the estimate is too low, then the library biases the signals sent to the market, which results in a deadweight loss.

The role of librariesHow the transaction and opportunity costs influence the decisions? The example with traditional media:

Benefit

Opportunity cost of using the library's subscription

Transaction cost of an individual

subscription

Maximum individual

subscription price

Peter 100,00 € 60,00 € 5,00 € 55,00 €Jane 100,00 € 20,00 € 5,00 € 15,00 €Irene 100,00 € 20,00 € 5,00 € 15,00 €Charles 100,00 € 20,00 € 5,00 € 15,00 €

100,00 €

Each patron has some

benefit from a journal...

...but using the library

represents additional costs (e.g.

travel)

If a customer buys its own copy of a journal, he has

additional expenses (space

on the shelf, paying the bill...)

This is the space for the publisher, he

can charge that price to an individual,

without the danger of loosing a customer.

The role of librariesHow the transaction and opportunity costs influence the decisions? The example with traditional media:

Benefit

Opportunity cost of using the library's subscription

Transaction cost of an individual

subscription

Maximum individual

subscription price

Maximum subscription

price via library

Peter 100,00 € 60,00 € 5,00 € 55,00 € 40,00 €Jane 100,00 € 20,00 € 5,00 € 15,00 € 80,00 €Irene 100,00 € 20,00 € 5,00 € 15,00 € 80,00 €Charles 100,00 € 20,00 € 5,00 € 15,00 € 80,00 €

100,00 € 280,00 €

Each patron has some

benefit from a journal...

...but using the library

represents additional costs (e.g.

travel)

If a customer buys its own copy of a journal, he has

additional expenses (space

on the shelf, paying the bill...)

On the other hand, he can charge the library for the subscription.

The value of a title for each customer is the difference between the received benefit

and library's opportunity costs.

The role of librariesSame example with digital journal:

Benefit

Opportunity cost of using the library's subscription

Transaction cost of an individual

subscription

Maximum individual

subscription price

Maximum subscription

price via library

Peter 100,00 € 1,00 € 1,00 € 0,00 € 99,00 €Jane 100,00 € 1,00 € 1,00 € 0,00 € 99,00 €Irene 100,00 € 1,00 € 1,00 € 0,00 € 99,00 €Charles 100,00 € 1,00 € 1,00 € 0,00 € 99,00 €

0,00 € 396,00 €

In the long run, the price will drop since the costs for publishers are lower.

Libraries "gather" and provide access to different bundles of information. Their transaction costs for patrons are lower than that for a group of publishers.

Spam as a negative externality

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cost

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sender's marginal cost

The cost of spamming includes originator's cost...

Spam as a negative externality

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cost

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marginal social cost

sender's marginal cost

...and marginal cost for receivers.

Spam as a negative externality

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marginal benefit

marginal social cost

sender's marginal cost

A spammer counts on some benefit for

his marketing efforts - he plans to send 40,000 copies.

Spam as a negative externality

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marginal benefit

marginal social cost

sender's marginal cost

...but there are too many copies of message for this activity to be at the optimum for the society.

...but there are too many copies of

message for this activity to be at the

optimum for the society.

Spam as a negative externality

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cost

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per

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marginal benefit

marginal social benefit

marginal social cost

sender's marginal cost

We forgot the benefits for the

society (the information reaches

the customer).

How to provide "a user friendly spam"?

Information literacy

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number of e-educated people

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marginal cost, supply

marginal benefit, demand

Personal value of a course for

atendees gives 3,000 atendees

with given marginal costs for

providing a course.

Information literacy

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number of e-educated people

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its,

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marginal cost, supply

marginal social benefit

marginal benefit, demand

Other activities in the society can have benefits

as well, thus we have positive network

externalities. They are not recognised on the

market!

The government can assess this with the

subsidy.

Creativity market

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demand

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Avtor maksimizira svoj donos z (monopolno) ceno

P, cena na ravni mejnih stroškov bi bila prenizka, da

bi financirala njegovo dejavnost.

Author maximizes his revenue through the higher price P. The price at his marginal cost would be critical for total costs recovery.

Copyrights induce the monopoly situations on the market.

Creativity market

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P

This results in a deadweight loss.

A possible solution: market segmentation

Supply side

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marginal cost

marginal social benefit

It can happen that author's creativity is at the social equilibrium

regarding marginal social benefit and his marginal

costs, but this doesn't cover his total costs.

Supply side

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Q''Q

marginal cost

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R'

...so he reduces his output and responds with

higher prices.

Supply side

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Q' Q''Q

marginal cost

marginal social benefit

R

R' The society can recognize this and

increases the copyright law enforcement (the lenght of the patent,

breadth - similarity,...)...

Creativity market

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price

marginal cost

demand

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QQ'

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P

P'

...but at a higher price.