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Information goods are commodities that provide value to consumers as a result of the information it contains and refers to any good or service that can be digitalized. Examples of information goods includes books, journals, computer software, music and videos. Information goods can be copied, shared, resold or rented. Information goods are durable and thus, will not be destroyed through consumption. As information goods have distinct characteristics as they are experience goods, have returns to scale and are non-rivalrous, the laws of supply and demand that depend on the scarcity of products do not frequently apply to information goods. As a result, the buying and selling of information goods differs from ordinary goods.
Information economics refers to a microeconomic theory that studies how information affects economic activities. An information marketplace differs from the market place of ordinary goods as information goods are not actually consumed and can be reproduced and distributed at a very low marginal cost. The unique characteristics of information goods complicate many standard economic theories.
Economic theories on information goods face the problem of dealing with two contradictory concepts. On one hand, information is regarded as an important economic resource for development as perfect information is a key requirement of the efficient-market hypothesis. As a result, complete information should be accessible and made available to everyone at no cost. However, actual markets often depend on information as a commodity, resulting in information goods. If information is a commodity, it will be potentially restricted in terms of access, cost, availability and completeness and thus, not be freely available.
Information goods have a number of characteristics that contribute to market failure. Information goods have very high fixed costs of production but can be reproduced with zero or very low marginal cost which can cause difficulties in competitive markets. Improvements in digital technology have also allowed information goods to be easily reproduced and distributed. For example, it can cost over a hundred million dollars to produce a movie, while the movie can easily be recorded in the cinema or online and distributed inexpensively. Furthermore, information goods typically incur sunk costs which are not recoverable. While there are copyright and piracy laws making it illegal for consumers to copy and distribute information goods, it is often difficult to detect copying and distributing activities which makes it hard for authorities to prevent the illegal distribution of information goods.
As information goods are experience goods, consumers may be reluctant to purchase them as they are unable to accurately assess the utility they would gain from the good before purchasing it. As a result, information goods can suffer from adverse selection and result in a type of market failure known as the lemon problem, which is where the quality of the goods traded in the market can decrease due to asymmetric information between a buyer and seller.
Information goods are also public goods meaning that they are non-rival and sometimes non-excludable. This is because one person’s consumption of an information good does not reduce other people’s enjoyment of the same good or diminish the amount available to other people. Additionally, a person generally cannot exclude others from consuming an information good.
Methods to overcome market failure
Producers of information goods can engage in a number of strategies to address the market failure that arises. In order to address the market failure that arises as a result of information goods being experience goods, producers can provide consumers with previews so that they can partially experience the good prior to purchasing it. For example, movie producers will often release a movie trailer and synopsis so that consumers know what the movie is about before they watch it which influences their likelihood of purchasing the good. Another way producers of information goods overcome the experience good problem is through reviews. By reading reviews and testimonials on information goods, consumers can determine the quality of an information good and know what it is before purchasing it. Additionally, to prevent market failure, producers can establish and maintain their brand reputation. This is because if an information good has a well-established brand reputation, consumers will be inclined to purchase it even if they are unable to determine how much satisfaction they will gain from the good before experiencing it.
In order to prevent consumers from copying and distributing information goods, copyright and piracy laws make it illegal for consumers to copy and reproduce goods that they did not produce. Laws and regulations address the market failure that occurs due to information goods having returns to scale by imposing penalties on individuals who illegally reproduce information goods which prevents them from doing so.
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- Intellectual property
- Information Economics
- Digital Millennium Copyright Act
- File sharing
- Information asymmetry
- Market failure
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