Martin Langeveld has this excellent post on the Nieman J-Lab site that summarizes some work done by Albert Sun, a UPenn math and economics student, Mouths of Babes Class of 2010. Sun tackles a topic that’s received little treatment: price discrimination in charging for content. I’ve been wondering when someone would do this. And as Langeveld points out, a lot of the things we are talking about these days can be explained by the trusty Samuelson text and our Micro 101 notes (e.g. the nature of a “public good,” the inherent instability of cartels, etc.)
And I get Sun’s arguments, for the most part. But here’s what’s nagging me: perhaps the central lesson of any basic microeconomics text is that in order to maximize profit, the firm prices to marginal cost. And in a world of free, perfect copies, isn’t the marginal cost of nearly all web content……zero?
June 14, 2009 at 3:05 pm |
Well, you could argue that the marginal cost of the next airline seat is zero, as well, except for the tiny amount of extra fuel and peanuts it takes to move you from point A to point B. Southwest airlines understands this very well. But still, some people are willing to pay a substantial premium for a Southwest seat because of a few extras Southwest throws in, like exchange and refund privileges, extra rewards points, early boarding and a free drink. In the content world, this can translate into premiums for niche-interest content, timely delivery, preferred delivery platforms or formats. Granted, pricing will be acceptable on a limited amount of content; anything that’s available free from multiple sources will have to remain free.
June 14, 2009 at 9:11 pm |
You’re right, I was too flippant. And there is a difference between true price discrimination (different prices for precisely the same commodity) and conjoint analysis (the study of who will pay how much for what bundle of product characteristics).
A few comments about airlines. First, they generally do the latter rather than the former. Second, they’ve done less of it over time. What Southwest pioneered wasn’t price discrimination, it was the opposite: they pierced the pricing umbrella created by pricing discrimation and drove the industry toward lower and more simple fare structures. Third, while a number of industries talk about price discrimination (usually when they are doing really badly), airlines are one of the few real-world examples which has held up. Finally, while it’s true that airlines have a zero marginal cost as long as a plane is not full, they have an enormous marginal cost when a flight is at capacity (and then the pricing analysis starts all over again). Not true for content providers.
If what you’re really arguing is that some people will pay for “premium content” services, sure. I just don’t think it’s big percentage or a very big price as they relate to blogs or newpapers.
June 15, 2009 at 12:12 am |
I’ve been a semi-long time reader of your blog and have enjoyed it, but your central lesson of microeconomics isn’t quite true.
Firms price to maximize profit, and it just happens that in perfect competition, the equilibrium profit maximizing price equals marginal cost.
But when you look at a monopolistic competition situation, firms can price above marginal cost and make an economic profit.
Also, it’s not entirely what a unit of content should be. Sure the marginal cost of distributing one more unit of an article is zero, but the marginal cost of writing and reporting one more article is not zero.
June 15, 2009 at 3:06 am |
Uh, yeah. But, isn’t the whole point of the debate that most news content has trended closer to perfect competition than monopolistic competition? If the situation more resembled the latter, wouldn’t the papers still have their franchises?
And I’m curious, what do you think the relevant unit of content should be? If it’s a topic or a fact rather than an article, then certainly the situation is closer to perfect competition, right? And how is it relevant that writing another article costs something? I thought the point was the difference in the marginal cost of producing something with the self-same characteristics? In a given article, that difference is zero, period. In an airplane seat, above capacity of a flight, it’s a lot.
July 23, 2009 at 8:52 pm
I’ve posted a more thought out response, that is long overdue, on my blog here.
http://albertsun.info/2009/07/marginal-cost-is-not-zero/