The author is using the lense of exchange rates to say that Candians are getting music cheaper.
This is wrong for two reasons. First, the advent of the Internet and its subsequent use as a distribution method of music has made music an information good. All music is charged at a monopoly price because the price at which music is sold is above the marginal cost of production.
Second, because all music is priced at a monopoly price, what is a "bargain" or "being ripped-off" is moot. We are all being "ripped-off" when we purchase music because we're paying above the marginal cost of production.
Yet the problem with information goods is that information is expensive to make and easy to deliver.
The story about price differences between countries is not a story about exchange rates, nor a story about getting ripped-off or getting bargain prices. It's a story about price discrimination.
In monopolies, price discrimination is good because it allows buyers to pay for the good at their respective reservation price. For instance, everyone needs water piped to their homes for say, $50 a month. The monopoly must charge that price for everyone and can't price discriminate (e.g. charge a different price for everyone). This type of monopoly is inefficient because those that can't afford $50 go without water, although the marginal cost to give that person who can't afford water is nill. Yet with the advent of digital technologies, global distribution and subsequent pricing has changed. Companies that want to sell music to different markets according to that particular market level of income can do so.
Compare music pricing to regional encoding and DVD pricing. It's the same story.
A couple things I'd like to note: when I describe market failure, it's purely from an economic perspective; meaning, that for information markets, markets do not equilibrate. Hal Varian, Suzzanne Scotchmer, Brad Delong discuss this issue from an economic perspective, and hence, describe information markets as a market failure (i.e. markets don't equilibrate properly).
Setting aside theory, we are still left with the problem we began with. Information goods (in our case music) is expensive to make, but cheap to copy. We want to reward "good" music creations, yet have the least amount of dead weight loss.
If we have market failures because of rivalry, excludability and information assymetrics, then the trick is to tackle this issue by solving some of the basic problems with the market.
The first would be exclusion. There are many other methods of exclusion and DRM strategies is just one instance of an exclusionary mechanism. Consider Google's page rank system. A user enter's the site and searches for information. At no point does Google give away Page Rank so that the user can use it him/herself. These systems (many people call "Call-Home Systems") allow creators of the information good to hold on to the actual good without compromising mass unauthorized distribution. Ofcourse, implementing such a system for music distribution whereby music is held in a location and is streamed, rather than given to consumers, would be a difficult sell to consumers.
Enter Suzzanne Scotchmer. Scotchmer uses micro-economic framework which can be applied in the music market. Her forthcoming book (MIT Press) gives us a framework of analysis to work from. A small portion of her research can be found here: http://ist-socrates.berkeley.edu/~scotch/
In particular, her working paper "Consumption Externalities, Rental Markets and Purchase Clubs" would be of particular interest. Just to note, she has taken down some of her work due to copyright issues, which have come about as her book is soon to be published. I'll send you some of her work via email. I'm assuming this would fall under the fair-use doctrine.
Thanks for your reply. I'll take a look at Liebowitz.
"Fundamentally, I'm going to argue that consumers download music, as much to derive extra value from getting something for free, as they do because they want insurance against buying something they didn't want in the first place. File-sharing is as much about risk-sharing as it is about the 'theft' of value."
The article addresses market failure through the lense of information asymmetries, moral hazard and agency costs. These explainations are classic economic (Ronald Coase) explainations of why there is a failure in the music market. Yet, the fundamental argument of this paper - that double moral hazard and information assymetries cause market failure in the music industry - misses the fundamental point of market failures in ALL information markets(software, music, art, books, etc).
Information goods resemble public goods. Consider the three tenet assumptions in properly functioning markets. The assumptions are 1) that the good is rivalrous, 2) that the good is excludable, 3) that there is full information when purchasing the good. Combinations of these three assumptions results in various types of goods, which require different economic models to solve. For instance, if the good is non-rival or non-excludable, the good is considered a public good. Some examples of public goods are public parks, the sun, air, etc. These types of goods are non-rival because your consumption doesn't deplete the good such from other users/consumers. Likewise, these goods are non-excludable because it is very hard to put a fence around it, and hence, rationing such good by a price mechanism.
Now, consider information goods in this sense. Information goods resemble public goods because they are non-rival and non-excludable. My consuming the information doesn't deplete the good and prevent others from using it and excluding others from consuming information (putting a fence around information) is very difficult. The fundamental problem within the music market is that we have a market failure from the start precisely because music is 1) non-rival 2) non-excludable.
The author tells us a story about the music market needing risk insurance, yet fails to consider the very notion of economic exchange in information goods. The problem with music is this. Consumers want music and indicate their preference for music by voting with their dollars. Yet, when the marginal cost of distributing the good is nil, and those that shouldn't be excluded from the market are being excluded, we have a problem. When you want to reward creators of music, and not exclude anyone from the market without specific reason, what is the right price you should sell your music?
I agree that there are problems with value indicators, (i.e. price of all music is the same ($12) and consumers can't reward music creators based on societal value), but I still see some fundamental flaws in his argument.
So who's working on the economic problem of information goods? Enter Suzzan Scotchmer, Brad Delong, John Zysman, Steve Weber, and Hal Varian.
These people are all Berkeley professors who discuss micro/macro level frameworks that give us tools for thought in information markets. There is an academic revolution going on at Berkeley and I'm very thankful, I am here to witness it.;)
For your reference, I am an undergraduate at UC Berkeley and have studied information economics for some time now. More information about me can be found here: www.dyoo.tk
There are two sides to the argument. On one end, there are those who advocate some type of regulation to deter offshore software development. Developers are losing jobs and that's a bad thing.
On the other end, there are those who think offshoring development is great. It allows those with little money to build cool products. It allows corporations to save money... yadi yada yada.
Let me just say this: developers who want us to stop offshoring are just asking us for more money for the same work.
"the issue of rivalry and exclusivity refers to the CD as an object"
I beg to differ. When we think about purchasing music, it's not the CD (the object) we're interested in. It's the information that's embedded on the CD - the beats of a song, tones of the voice, etc. A CD is just a means of delivery. I don't buy a CD because of the looks. I buy it for the song. Music is an information good, not a physical good.
"The classic example of a public good (non-rival, non-exclusive) is a lighthouse. As the lighthouse gives off light, any one ship taking advantage of that light does not take anything away from anyone else using it (non-rival), and the operator of the lighthouse has no means by which to exclude any one individual from taking advantage of the light (non-exclusive). A CD in no way fits this description"
Your lighthouse example is quite unique, which makes information as public goods theory more relevant. First, if I play music in a public park, there's no way to exclude people from listening to that music. A similar behavior can be recognized with music on the Internet. When CDs are made into mp3s and uploaded on to the Internet where people can download the song, it's very difficult to exclude people (excludability)
Second, anyone downloading music doesn't take away from anyone else because the marginal cost of producing that extra unit is zero, or nearly so.
There are alot of econ books on information goods floating around these days. Shapiro and Katz are well known for their works on information goods. I think you can find their work on econpapers.com
Suzanne Scotchmer's forthcoming work also recognizes information goods as public goods. Her work can be found here: http://socrates.berkeley.edu/~scotch/syllabus.htm
Re:My theory - perfect information
on
RIAA vs The Economy
·
· Score: 2, Insightful
A good in a perfectly competitive market contains three characteristics - rivalry, excludability and transparency (many people call transparency, perfect information as well). Failure to meet any of these requirements constitutes market failure.
Rivalry simplpy means this: while you consume the good, no one else can consume that same good. For instance, when you eat an apple, that apple is removed from the apple market. No one else can eat that apple except you.
Excludablitiy refers to the ability for companies to exclude that good from you. If you purchase an orange, the orange is excluded from you by security gaurds watching you, price, etc.
Lastly, transparency refers to perfect information. You obviously get the point.
Now, in information markets (CDs included), the good is non-rival and non-excludeable. First, if listen to a song, you can listen to it at the same time. It doesn't take away from the total marketplace. Second, the good is non-excludable. Listening to a song is very easy. We can listen to the song on TV, radio, the internet, etc.
Hence, information goods resemble public goods because the goods are non-rival and non-excludable.
you're wrong... stop spreading lies. The copper infrastructure was deployed by Korea Telecom, the ILEC of Korea. Multiple CLEC now deploy infrastructure. Dacom and Hanaro are among a few. Where do you get your stupid crap idiot.
Yep... Luckily I have had the opportunity to read most of Delong's works. If you like his works at explaining information economics, you'll probably enjoy another Cal economist whom I have a class with at present...
http://socrates.berkeley.edu/~scotch/syllabus.ht m
Author: Suzanne Scotchmer Look for "Information Goods and Intellectual Property and Design of Intellectual Property." These works are forthcoming in a future college text book on information economics.
An interesting point was made about intellectual property rights in the health care industry (patents on medicine). Some here have argued that IP in the hands of corporations cause those in dire needs, such as AIDS patients, to go helpless. Others here argue that without intellectual property rights in the health care industry, nothing will ever get done.
It is important for everyone to realize in health care markets, governments should fund most if not all research; in the health care market, intellectual property suffers from market failure and inefficient allocation of goods.
In markets dealing with physical goods, such as a potato, goods are allocated efficiently because people who need those particular goods recieve them at the right price; that is, the demand for such good will be met by the supply for such good. Following this logic, if there is a market for, say bottled beef, those demanding the good will be supplied. Markets that allocate physical goods TEST such products to determine if they are useful and needed by society. Bottled beef would clearly fail the market test because people demanding bottled beef would be little to none, and the cost to supply such good would be greater than the benefit users or society derives. Markets that allocate physical goods act as a testing mechanism, determining whether society needs a particular good.
Intellectual property in the health care industry, particularly patents on drugs, does not need such testing mechanism because EVERYONE deems physical health necessary. A patent on AIDS drugs unnecessarily excludes those that can't pay for such drugs. Hence, intellectual property in the health care industry suffers one of the greatest market failures because everyone that needs drugs cannot recieve them. In this sense, health care, like national security, is a public good. Governments should find ways to provide health care to everyone universally, NOT exclude them ineffciently.
Slashdot Mirror
http://images.google.com/imgres?imgurl=www.anomali es-unlimited.com/Science/Images/Gel.jpg&imgrefurl= http://www.anomalies-unlimited.com/Science/Aerogel .html&h=247&w=391&start=2&prev=/images%3Fq%3Daerog el%2Bnasa%26svnum%3D10%26hl%3Den%26lr%3D%26ie%3DUT F-8%26oe%3DUTF-8
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t /c nn/2002/TECH/space/05/09/record.gel/story2.light.g el.jpg&imgrefurl=http://www.cnn.com/2002/TECH/spac e/05/09/record.gel/&h=168&w=220&start=19&prev=/ima ges%3Fq%3Daerogel%2Bnasa%26svnum%3D10%26hl%3Den%26 lr%3D%26ie%3DUTF-8%26oe%3DUTF-8
or
http://images.google.com/imgres?imgurl=spacefli
or
http://images.google.com/imgres?imgurl=i.cnn.ne
The author is using the lense of exchange rates to say that Candians are getting music cheaper.
This is wrong for two reasons. First, the advent of the Internet and its subsequent use as a distribution method of music has made music an information good. All music is charged at a monopoly price because the price at which music is sold is above the marginal cost of production.
Second, because all music is priced at a monopoly price, what is a "bargain" or "being ripped-off" is moot. We are all being "ripped-off" when we purchase music because we're paying above the marginal cost of production.
Yet the problem with information goods is that information is expensive to make and easy to deliver.
The story about price differences between countries is not a story about exchange rates, nor a story about getting ripped-off or getting bargain prices. It's a story about price discrimination.
In monopolies, price discrimination is good because it allows buyers to pay for the good at their respective reservation price. For instance, everyone needs water piped to their homes for say, $50 a month. The monopoly must charge that price for everyone and can't price discriminate (e.g. charge a different price for everyone). This type of monopoly is inefficient because those that can't afford $50 go without water, although the marginal cost to give that person who can't afford water is nill. Yet with the advent of digital technologies, global distribution and subsequent pricing has changed. Companies that want to sell music to different markets according to that particular market level of income can do so.
Compare music pricing to regional encoding and DVD pricing. It's the same story.
Hello Umair,
A couple things I'd like to note: when I describe market failure, it's purely from an economic perspective; meaning, that for information markets, markets do not equilibrate. Hal Varian, Suzzanne Scotchmer, Brad Delong discuss this issue from an economic perspective, and hence, describe information markets as a market failure (i.e. markets don't equilibrate properly).
Setting aside theory, we are still left with the problem we began with. Information goods (in our case music) is expensive to make, but cheap to copy. We want to reward "good" music creations, yet have the least amount of dead weight loss.
If we have market failures because of rivalry, excludability and information assymetrics, then the trick is to tackle this issue by solving some of the basic problems with the market.
The first would be exclusion. There are many other methods of exclusion and DRM strategies is just one instance of an exclusionary mechanism. Consider Google's page rank system. A user enter's the site and searches for information. At no point does Google give away Page Rank so that the user can use it him/herself. These systems (many people call "Call-Home Systems") allow creators of the information good to hold on to the actual good without compromising mass unauthorized distribution. Ofcourse, implementing such a system for music distribution whereby music is held in a location and is streamed, rather than given to consumers, would be a difficult sell to consumers.
Enter Suzzanne Scotchmer. Scotchmer uses micro-economic framework which can be applied in the music market. Her forthcoming book (MIT Press) gives us a framework of analysis to work from. A small portion of her research can be found here: http://ist-socrates.berkeley.edu/~scotch/
In particular, her working paper "Consumption Externalities, Rental Markets and Purchase Clubs" would be of particular interest. Just to note, she has taken down some of her work due to copyright issues, which have come about as her book is soon to be published. I'll send you some of her work via email. I'm assuming this would fall under the fair-use doctrine.
Thanks for your reply. I'll take a look at Liebowitz.
"Fundamentally, I'm going to argue that consumers download music, as much to derive extra value from getting something for free, as they do because they want insurance against buying something they didn't want in the first place. File-sharing is as much about risk-sharing as it is about the 'theft' of value."
;)
The article addresses market failure through the lense of information asymmetries, moral hazard and agency costs. These explainations are classic economic (Ronald Coase) explainations of why there is a failure in the music market. Yet, the fundamental argument of this paper - that double moral hazard and information assymetries cause market failure in the music industry - misses the fundamental point of market failures in ALL information markets(software, music, art, books, etc).
Information goods resemble public goods. Consider the three tenet assumptions in properly functioning markets. The assumptions are 1) that the good is rivalrous, 2) that the good is excludable, 3) that there is full information when purchasing the good. Combinations of these three assumptions results in various types of goods, which require different economic models to solve. For instance, if the good is non-rival or non-excludable, the good is considered a public good. Some examples of public goods are public parks, the sun, air, etc. These types of goods are non-rival because your consumption doesn't deplete the good such from other users/consumers. Likewise, these goods are non-excludable because it is very hard to put a fence around it, and hence, rationing such good by a price mechanism.
Now, consider information goods in this sense. Information goods resemble public goods because they are non-rival and non-excludable. My consuming the information doesn't deplete the good and prevent others from using it and excluding others from consuming information (putting a fence around information) is very difficult. The fundamental problem within the music market is that we have a market failure from the start precisely because music is 1) non-rival 2) non-excludable.
The author tells us a story about the music market needing risk insurance, yet fails to consider the very notion of economic exchange in information goods. The problem with music is this. Consumers want music and indicate their preference for music by voting with their dollars. Yet, when the marginal cost of distributing the good is nil, and those that shouldn't be excluded from the market are being excluded, we have a problem. When you want to reward creators of music, and not exclude anyone from the market without specific reason, what is the right price you should sell your music?
I agree that there are problems with value indicators, (i.e. price of all music is the same ($12) and consumers can't reward music creators based on societal value), but I still see some fundamental flaws in his argument.
So who's working on the economic problem of information goods? Enter Suzzan Scotchmer, Brad Delong, John Zysman, Steve Weber, and Hal Varian.
These people are all Berkeley professors who discuss micro/macro level frameworks that give us tools for thought in information markets. There is an academic revolution going on at Berkeley and I'm very thankful, I am here to witness it.
For your reference, I am an undergraduate at UC Berkeley and have studied information economics for some time now. More information about me can be found here: www.dyoo.tk
There are two sides to the argument. On one end, there are those who advocate some type of regulation to deter offshore software development. Developers are losing jobs and that's a bad thing.
On the other end, there are those who think offshoring development is great. It allows those with little money to build cool products. It allows corporations to save money... yadi yada yada.
Let me just say this: developers who want us to stop offshoring are just asking us for more money for the same work.
"the issue of rivalry and exclusivity refers to the CD as an object"
I beg to differ. When we think about purchasing music, it's not the CD (the object) we're interested in. It's the information that's embedded on the CD - the beats of a song, tones of the voice, etc. A CD is just a means of delivery. I don't buy a CD because of the looks. I buy it for the song. Music is an information good, not a physical good.
"The classic example of a public good (non-rival, non-exclusive) is a lighthouse. As the lighthouse gives off light, any one ship taking advantage of that light does not take anything away from anyone else using it (non-rival), and the operator of the lighthouse has no means by which to exclude any one individual from taking advantage of the light (non-exclusive). A CD in no way fits this description"
Your lighthouse example is quite unique, which makes information as public goods theory more relevant. First, if I play music in a public park, there's no way to exclude people from listening to that music. A similar behavior can be recognized with music on the Internet. When CDs are made into mp3s and uploaded on to the Internet where people can download the song, it's very difficult to exclude people (excludability)
Second, anyone downloading music doesn't take away from anyone else because the marginal cost of producing that extra unit is zero, or nearly so.
There are alot of econ books on information goods floating around these days. Shapiro and Katz are well known for their works on information goods. I think you can find their work on econpapers.com
Suzanne Scotchmer's forthcoming work also recognizes information goods as public goods. Her work can be found here: http://socrates.berkeley.edu/~scotch/syllabus.htm
A good in a perfectly competitive market contains three characteristics - rivalry, excludability and transparency (many people call transparency, perfect information as well). Failure to meet any of these requirements constitutes market failure.
Rivalry simplpy means this: while you consume the good, no one else can consume that same good. For instance, when you eat an apple, that apple is removed from the apple market. No one else can eat that apple except you.
Excludablitiy refers to the ability for companies to exclude that good from you. If you purchase an orange, the orange is excluded from you by security gaurds watching you, price, etc.
Lastly, transparency refers to perfect information. You obviously get the point.
Now, in information markets (CDs included), the good is non-rival and non-excludeable. First, if listen to a song, you can listen to it at the same time. It doesn't take away from the total marketplace. Second, the good is non-excludable. Listening to a song is very easy. We can listen to the song on TV, radio, the internet, etc.
Hence, information goods resemble public goods because the goods are non-rival and non-excludable.
you're wrong... stop spreading lies. The copper infrastructure was deployed by Korea Telecom, the ILEC of Korea. Multiple CLEC now deploy infrastructure. Dacom and Hanaro are among a few. Where do you get your stupid crap idiot.
Yep... Luckily I have had the opportunity to read most of Delong's works. If you like his works at explaining information economics, you'll probably enjoy another Cal economist whom I have a class with at present...
t m
http://socrates.berkeley.edu/~scotch/syllabus.h
Author: Suzanne Scotchmer
Look for "Information Goods and Intellectual Property and Design of Intellectual Property." These works are forthcoming in a future college text book on information economics.
An interesting point was made about intellectual property rights in the health care industry (patents on medicine). Some here have argued that IP in the hands of corporations cause those in dire needs, such as AIDS patients, to go helpless. Others here argue that without intellectual property rights in the health care industry, nothing will ever get done.
It is important for everyone to realize in health care markets, governments should fund most if not all research; in the health care market, intellectual property suffers from market failure and inefficient allocation of goods.
In markets dealing with physical goods, such as a potato, goods are allocated efficiently because people who need those particular goods recieve them at the right price; that is, the demand for such good will be met by the supply for such good. Following this logic, if there is a market for, say bottled beef, those demanding the good will be supplied. Markets that allocate physical goods TEST such products to determine if they are useful and needed by society. Bottled beef would clearly fail the market test because people demanding bottled beef would be little to none, and the cost to supply such good would be greater than the benefit users or society derives. Markets that allocate physical goods act as a testing mechanism, determining whether society needs a particular good.
Intellectual property in the health care industry, particularly patents on drugs, does not need such testing mechanism because EVERYONE deems physical health necessary. A patent on AIDS drugs unnecessarily excludes those that can't pay for such drugs. Hence, intellectual property in the health care industry suffers one of the greatest market failures because everyone that needs drugs cannot recieve them. In this sense, health care, like national security, is a public good. Governments should find ways to provide health care to everyone universally, NOT exclude them ineffciently.