Chapter 2 : Supply-side economics of scale
Due to their scale of operations, companies can obtain costs advantages : The average total cost
per unit of output decreases with increasing scale.
Fix costs are divided over a higher number of units and the variable costs can decrease with
scale. This is because higher level of production levels allow for specialization.
Firms operating at a larger scale can use their advantage when buying larger quantities, they can
make negotiations with their suppliers to receive discounts.
In traditional economy, this can give them a large cost-advantage compared to their
competitors.
Companies in the Information technology gain also strong supply-side economies of scale, but the
reason behind it is different:
Main point : Costs structure for information goods is different
The main point is pretty straightforward
and can be summarized. It is assumed
that fixed costs are constant and that
there are zero marginal costs. The
problem with this is that you hardly ever
have this kind of situation, because at a
certain point a company will hit limits.
This cost structure is very common for information goods.
In tegenstelling tot fysieke producten hebben informatieproducten, zoals digitale inhoud, vaak
constante vaste kosten en nul marginale kosten. Dit betekent dat het produceren van extra
eenheden van een digitaal product geen extra kosten met zich meebrengt, en de initiële kosten
worden gelijkmatig verdeeld over alle geproduceerde eenheden.
Dergelijke kostenstructuren, met constante vaste kosten en nul marginale kosten, zijn zeldzaam in
andere sectoren dan technologie en informatie. Dit benadrukt dat dit kenmerkend is voor digitale
en informatieve goederen.
Cost structure : Information goods are costly to produce but cheap to reproduce
Several implications : Cost based pricing strategies will not work. Value based strategies are
more appropriate.
Content
Definition of information goods
Properties
Case : Encyclopedia Britannica
Cost structure
Cost Structure : Implications
Cases : financial info, games, search engines
Fadia Farhat | VUB 2023-2024 27
,Definition of information goods
Shapiro en Varian (1998, p. 3): "We
gebruiken het begrip 'informatie' zeer
ruim. In essentie is alles wat kan worden
gedigitaliseerd - gecodeerd als een
reeks bits - informatie. Voor onze
doeleinden vallen baseballscores,
boeken, databases, tijdschriften, films,
muziek, aandelenkoersen en
webpagina's allemaal onder informatieproducten."
Quah (2003, p. 6): "Een digitaal goed is een payoff-relevante bitreeks, dat wil zeggen een reeks
binaire cijfers, 0'en en 1'en, die invloed heeft op het nut of de opbrengst voor een individu in de
economie."
Øverby & Audestad (2021, p. 74): "Een digitaal goed is een genetwerkt virtueel object zonder
marginale kosten dat waarde heeft voor bepaalde individuen of organisaties."
Last definition already gives information about the cost structure. The combination of definitions
should give an idea of what information goods are.
Information goods, or digital goods, are virtual objects with value for individuals or organizations,
including items like baseball scores, books, databases, and more (Shapiro and Varian, 1998). They are
encoded as a bitstring, influencing utility or payoff (Quah, 2003), and are networked with zero marginal
cost, allowing replication without added expenses (Øverby & Audestad, 2021). These goods are easily
delivered via the internet.
Networked means that the
goods can be delivered to customers
via the internet
Virtual goods : meaning that the
goods are intangible but that it can be
stored as data on a digital medium,
such as a computer or smart phone, in
a cloud.
Zero marginal costs is a very
important characteristic of digital
goods
Fadia Farhat | VUB 2023-2024 28
, Value aspect
Characteristics of information goods :
Virtual objects
Have value (for someone)
They can be replicated without any cost = zero marginal cost
Can be delivered to consumers via the internet
Non digital goods are : devices, computers,….
Five Properties based on the article of Quah
1) Non-rival - Niet-rivaliserend
2) Infinitely expansible - Oneindig schaalbaar
3) Discrete - Afzonderlijk
4) Aspatial – Niet-ruimtelijk
5) Recombinant – Hercombineerbaar
Five Properties (QUAH) : Non-rival
A good is rival if it is reduced in quantity after
consumption of it or when using the good, prevent other of using it.
Digital goods are non-rival by nature.
For an excludable good it is possible to prevent consumers from using or accessing it.
Digital goods are non-excludable goods
Based on this 2 properties, goods can be
classified in 4 categories.
What means that digital goods that are
non-rival by nature are either
excludable (club goods)
eg : Netflix video; e-books (if payable)
non-excludable (public goods)
eg : webpages; gmail
Fadia Farhat | VUB 2023-2024 29
Due to their scale of operations, companies can obtain costs advantages : The average total cost
per unit of output decreases with increasing scale.
Fix costs are divided over a higher number of units and the variable costs can decrease with
scale. This is because higher level of production levels allow for specialization.
Firms operating at a larger scale can use their advantage when buying larger quantities, they can
make negotiations with their suppliers to receive discounts.
In traditional economy, this can give them a large cost-advantage compared to their
competitors.
Companies in the Information technology gain also strong supply-side economies of scale, but the
reason behind it is different:
Main point : Costs structure for information goods is different
The main point is pretty straightforward
and can be summarized. It is assumed
that fixed costs are constant and that
there are zero marginal costs. The
problem with this is that you hardly ever
have this kind of situation, because at a
certain point a company will hit limits.
This cost structure is very common for information goods.
In tegenstelling tot fysieke producten hebben informatieproducten, zoals digitale inhoud, vaak
constante vaste kosten en nul marginale kosten. Dit betekent dat het produceren van extra
eenheden van een digitaal product geen extra kosten met zich meebrengt, en de initiële kosten
worden gelijkmatig verdeeld over alle geproduceerde eenheden.
Dergelijke kostenstructuren, met constante vaste kosten en nul marginale kosten, zijn zeldzaam in
andere sectoren dan technologie en informatie. Dit benadrukt dat dit kenmerkend is voor digitale
en informatieve goederen.
Cost structure : Information goods are costly to produce but cheap to reproduce
Several implications : Cost based pricing strategies will not work. Value based strategies are
more appropriate.
Content
Definition of information goods
Properties
Case : Encyclopedia Britannica
Cost structure
Cost Structure : Implications
Cases : financial info, games, search engines
Fadia Farhat | VUB 2023-2024 27
,Definition of information goods
Shapiro en Varian (1998, p. 3): "We
gebruiken het begrip 'informatie' zeer
ruim. In essentie is alles wat kan worden
gedigitaliseerd - gecodeerd als een
reeks bits - informatie. Voor onze
doeleinden vallen baseballscores,
boeken, databases, tijdschriften, films,
muziek, aandelenkoersen en
webpagina's allemaal onder informatieproducten."
Quah (2003, p. 6): "Een digitaal goed is een payoff-relevante bitreeks, dat wil zeggen een reeks
binaire cijfers, 0'en en 1'en, die invloed heeft op het nut of de opbrengst voor een individu in de
economie."
Øverby & Audestad (2021, p. 74): "Een digitaal goed is een genetwerkt virtueel object zonder
marginale kosten dat waarde heeft voor bepaalde individuen of organisaties."
Last definition already gives information about the cost structure. The combination of definitions
should give an idea of what information goods are.
Information goods, or digital goods, are virtual objects with value for individuals or organizations,
including items like baseball scores, books, databases, and more (Shapiro and Varian, 1998). They are
encoded as a bitstring, influencing utility or payoff (Quah, 2003), and are networked with zero marginal
cost, allowing replication without added expenses (Øverby & Audestad, 2021). These goods are easily
delivered via the internet.
Networked means that the
goods can be delivered to customers
via the internet
Virtual goods : meaning that the
goods are intangible but that it can be
stored as data on a digital medium,
such as a computer or smart phone, in
a cloud.
Zero marginal costs is a very
important characteristic of digital
goods
Fadia Farhat | VUB 2023-2024 28
, Value aspect
Characteristics of information goods :
Virtual objects
Have value (for someone)
They can be replicated without any cost = zero marginal cost
Can be delivered to consumers via the internet
Non digital goods are : devices, computers,….
Five Properties based on the article of Quah
1) Non-rival - Niet-rivaliserend
2) Infinitely expansible - Oneindig schaalbaar
3) Discrete - Afzonderlijk
4) Aspatial – Niet-ruimtelijk
5) Recombinant – Hercombineerbaar
Five Properties (QUAH) : Non-rival
A good is rival if it is reduced in quantity after
consumption of it or when using the good, prevent other of using it.
Digital goods are non-rival by nature.
For an excludable good it is possible to prevent consumers from using or accessing it.
Digital goods are non-excludable goods
Based on this 2 properties, goods can be
classified in 4 categories.
What means that digital goods that are
non-rival by nature are either
excludable (club goods)
eg : Netflix video; e-books (if payable)
non-excludable (public goods)
eg : webpages; gmail
Fadia Farhat | VUB 2023-2024 29
