Optimal Entry in Information Product Sectors

Roger A. McCain
Drexel University, Philadelphia
McCainRA@dunx1.ocs.drexel.edu
http://william-king.www.drexel.edu/top/eco/infff/Infoprod.html

Abstract

Many information products (including computer application programs, recorded and broadcast performances, and a variety of others) share to some degree the key characteristics of ``public goods". For ``public goods", consumption is absolutely joint and there is no possibility of collecting fees from consumers as a condition of their consumption. In most cases, these characteristics are less extreme in the case of information products: the information products are not ``public goods", but ``quasi-public goods", somewhere in the middle ground between pure public and pure private goods. This has supported the view that information products (like public goods) will be undersupplied in a free market. This in turn supports supports the idea that producers of information products need special protection, such as strong ``intellectual property" statutes or (in some cases, especially in the arts) subsidy.

However, recent research has indicated that ``all-or-nothing competition" can result in oversupply (e.g. Frank and Cook, McCain). Moreover, the characteristic of goods that favor all-or-nothing competition - extreme economies of scale, such as might be associated with the cheap reproduction of a costly master pattern - are similar to one of those that define quasi-public goods, namely, a high degree of jointness in consumption. According to the following simple argument, economies of scale lead to winner-take-all competitions: ``When everybody use the best word processor for Windows, why should anyone use the second best?" Moreover, the informal discussions in terms of cheap reproduction of a costly master suggest that information products are subject to winner-take-all competition.

Are, then, information products oversupplied or undersupplied? This paper 1) defines ``information products" in a way intended to avoid the unanswerable question ``what it information?" 2) Discusses the connection between information products and the quasi-public good characteristics, and those favoring all-or-nothing competition, 3) Presents a simple model of quasi-public goods, based on the cost of enforcement of property rights, that distinguished cases of underproduction and overproduction, and 4) Applies the model in a comparison of the markets for computer softwared, artistic performances, and inventions in agricultural technology.