Emergic: Rajesh Jain's Blog

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Information Markets

February 19th, 2004 · No Comments

Ross Mayfield comments on Jeff Jarvis’s commentary on Eli Noam’s article in the FT on the market failure in the information economy.

Eli Noam: “We need to recognise that the entire information sector – from music to newspapers to telecoms to internet to semiconductors and anything in-between – has become subject to a gigantic market failure in slow motion. A market failure exists when market prices cannot reach a self-sustaining equilibrium. The market failure of the entire information sector is one of the fundamental trends of our time, with far-reaching long-term effects, and it is happening right in front of our eyes…The basic structural reason for this problem is that information products are characterised by high fixed costs and low marginal costs. They are expensive to produce but cheap to reproduce and distribute, and therefore exhibit strong economies of scale with incentives to an over-supply. Second, more information products are continuously being offered to users. And information products and services are becoming more “commodified”, open, and competitive. The main result of these factors is that prices for content, network distribution and equipment are collapsing across a broad front.”

Jeff: “He’s right that consolidation is a market reaction to this trend (and that’s why government regulation of such consolidation fundamentally mucks with the market). We will see the big get bigger, like supernovas exploding. But underneath them, we are seeing little guys grow on an entirely different scale. And that’s where I think the professor is wrong: There is more demand for information and media than ever. The market is not collapsing. Yes, prices are. But so are costs. And so, some of this growing demand will be served in new ways. And the big guys will not be out of the picture.”

Ross: “Jeff rightly points out that demand for information is elastic (although there are the constraints of attention) the costs of production are falling as well as cost of distribution. The industry is shifting from economies of scale and speed to that of span and scope. To describe this in industry parlance, margins come from versioning and bundling (scope) and aggregation (span). Somewhere in the span, the line between producer and consumer is being blurred. New combinations of goods are further decommoditized through the very act of consumers participating in production. But all products and industries trend towards commoditization, embrace it.”

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