There is an idea that has been popping up a lot lately (Mostly in conjunction with Chris Anderson’s book The Long Tail) called the “economy of abundance.” Its the idea that in a digital age when the cost of production nears zero that scarcity (upon which classical economics is based) disappears. This creates some very interesting problems, because when you plug zero in to economics equations involving scarcity they tend to blow up. There are many issues still yet to be hashed out with the economics of abundance, but taking the theory into account in certain situations is nevertheless very interesting. One particular application I am interested in is understanding this idea in conjunction with artificial scarcity. That is, the intentionally limited production of goods with a marginal cost near or at zero.
One of the best examples I could think of for this was the recently introduced Facebook gifts. It’s the first example I can think of where the gift-economy and infinite supply collide. (I actually think Hot or Not has something similar to this too) Facebook is allowing people to give value in gift-economy terms (e.g. karma, honor, loyalty, enjoyment, etc.) for an economic return ($1). The difference between a traditional gift economy and this is that Facebook has created this value at negligible cost, basically making economic value out of nothing. In this case, I have a feeling that even in the case of unlimited supply that the gifts would still sell.
Other interesting applications for this theory include studies as to why DRM-free music (In this case DRM, technically limits the supply, or at least the proliferation of it) does not have to spell the end of the music industry (Quite the contrary as Steve Jobs argues in his controversial letter, “Thoughts on Music“). However, even this is not exactly the same comparison. The cost of an album or DVD can me more directly related to variable costs associated with the creation of that product and there is an upper bound at which the consumer is unwilling to pay for the privilege enjoying that media. Also, people are usually willing to buy music (its not directly related to the gift economy), but not something like a Facebook gift, for themselves.
Its really interesting that even in a post-scarcity economy it seems that there is a lower bound on the demand curve (price is maintained in light of infinite supply). Apparently in this case price is not necessarily set where the supply and demand curves meet.
It would be very interesting to see some data points about the effect artificial scarcity has on this lower bound. These are just some ideas and this is something I’m very interested in exploring at more depth, let me know what you think.
Related Links:
Wikipedia - Artificial Scarcity
Wikipedia - Post Scarcity Economy
The important point which you seem to have missed here is that these new products with infinite availability and near-zero marginal cost are controlled by one entity - and to deal with that you need to use the equations relating to monopolies and captive markets, not those for classical competitive markets.
This should be underlined by your observation that price is maintained even though supply is infinite and cost is zero. This does not fit classical economic theory for a competitive market at all, but is a perfect fit for monopolies and captive markets.
A much older example is the Windows OS which we can reasonably assume to have a cost of development and production less than 5% of the net license fees obtained. In this case, just as with your examples, unlimited supply with near-zero incremental cost has no influence upon the price.
You might want to focus your consideration on the much more interesting problem of stability semi-captive market in which the penalty for overpricing is a very rapid and normally irreversible loss of captivity in the market place.
vincevincevince
April 28th, 2007