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!
