Why comparing prices does not make sense

Yesterday we were discussing the characteristics of the information economy in our class. I was using and referring to the book by Shapiro and Varian (1999) titled “Information Rules”. It is a great book, a true classic and in many ways very valid today despite the fact that it was written over ten years ago. It explains many of the characteristics of the information economy very clearly.

I wanted to make sure that at least in some way I was able to explain some of the ideas and concepts of the book. To do this I made a populist test by asking a question before I started the lecture and by repeating the same question at the end of the lecture. I told students that comparing prices makes no sense in the information economy. Then I asked how many compare prices? Everybody does. At the end of the lecture I repeated my hypothesis and once again asked the same question: how many compare prices? Once again everybody continued with comparing prices. It seemed that no change had taken place. Had my lesson gone to waste? Or was I barking up the wrong tree?

The point Shapiro&Varian make in their book is that the fixed cost of producing information goods are both large and sunk. The fact that the cost is also sunk means that it is very difficult - practically impossible - to retrieve the cost one has invested in making an information product. For example if you have invested hundreds of hours in writing a book and the book does not sell, there is no way you can retrieve the cost of your investment i.e. get paid.

Shapiro&Varian point out that the variable cost of information production also has an unusual structure: the cost of producing an additional copy typically does not increase even if a great number of copies are made.

From these characteristics of information goods Shapiro&Varian conclude 1)“Information markets will not, and cannot look like text book perfect markets in which there are many suppliers offering similar products, each lacking the ability to influence prices”, 2) low variable cost offers great marketing possibilities and 3)they instruct companies to avoid commoditization.

My populist conclusion from all of this was: “comparing prices does not make sense”

One should and this I was trying to explain to the students be very aware that at best pricing can be very personalised. Even shops and supermarkets could have different prices in the morning and different pricess in the evening. At best they could have a price specifically tailored to you i.e. when you walk in the shopkeeper decides instantaneously whether to give you low medium or high prices. Of course in a physical environment this does not really work.

In the virtual environment personalised pricing is very possible and often the norm and by versioning products and services one can make the product look different and hence avoid price comparison and commoditization and from the perspective of the consumer this leads to the statement that there is not necessarily much sense in price comparison.

What should the consumer do? Well in my view he should be very aware that prices can fluctuate in the information economy. He or she should also have a general understanding of prices and price levels. In particular he or she should focus on what the value of the product or service is to him or herself and to express the value also in money. Then all the consumer needs to do is wait until somebody has a promotional price which is acceptable to the consumer and once this happens: grab the deal!