Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Those Media Products are Misbehaving Economic Goods

Posted on | November 14, 2015 | No Comments

Bad, bad media. Or so economists would have us believe. Media and information products just don’t fit the mold, or should I say, model. Most economic thinking is based on models that make simple assumptions about the types of goods and services that are produced and purchased. Economists like their tight little models and the most relevant to their profession is the one that brings together supply and demand curves and justifies their belief in the power of the equilibrium price, that magical point where all suppliers and consumers are happy.

But this model works best when the product “behaves” – when it is purchased by one consumer and is consumed in its entirety. The models break down when applied to media products like books, broadcast television, broadband, streaming music, etc. To understand what type of economic goods – products or services that can command a price when sold, these are – we have to start an analysis with two important concepts. That can help us understand the dynamics of media goods and their ramifications regarding pricing, but also policy.

Economists like to talk about two characteristics of goods and services called rivalry and excludability. Rivalry is when someone purchases a good, and it is consumed entirely by that person. This phenomenon is sometimes called subtractability because in a sense, the process subtracts, it deletes the product from the economy. Economists usually use some physical good like a hamburger as an example. When a burger is purchased, it is used up, consumed, subtracted from the market. A book, on the other hand, is not used up. It can be read again and again. It can be given to another person whole, and its content read in part or entirely without its consumption – without its subtraction. What about watching a movie on Netflix? Or watching it at the cinema? How about purchasing a DVD? How do these goods differ and what are the economic and policy consequences?

Some media products can be consumed without paying, such as broadcast media and much of the content on the Internet. This raises the issue of excludability. Excludability is when consumption is limited to paying customers. It is the degree to which you can exclude non-paying customers. How can you exclude someone from using or consuming your media product if they do not pay? Broadcast media faced this problem. Radio, and then television, transmitted signals that could be picked up by anyone with the appropriate receiving equipment. The digitization of sound encoded into MP3s created a crisis in the music industry as they could easily be shared over the Internet with peer-to-peer applications like Napster. Broadcast media are nonrivalrous, meaning they are not consumed, but also nonexcludable, meaning people can access without paying.

Even newspapers that are bought and discarded, say on a train, can be used by someone else. Newspapers were the first to start using advertising to alleviate this problem. In fact, the more people it reached, the more valuable was an advertising expenditure. Media goods became “dual product markets” where content is sold to audiences, and audiences are packaged and sold to advertisers. It becomes an interesting pricing calculus for media producers to determine the right mix for selling content, and consequently reducing the size of the audience, or focusing on a larger audience so that higher advertiser rates can be charged.

Digital media economic goods need to be better understood in terms of their economic characteristics. Smartphones, books, games, game consoles, movies, television shows, music CDs, music streaming, broadband service, etc. Each displays varying degrees of rivalry and excludability.

In a future post, I want to outline four different types of economic goods: private goods, public goods, common goods, and club goods. Each of these point to the characteristics of different types of economic goods. Each of these economic types displays varying degrees of rivalry and excludability. Media and IT goods differ but fall along a continuum of these products.

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AnthonybwAnthony J. Pennings, PhD is the Professor of Global Media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Honolulu, Hawaii during the 1990s.

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  • About Me

    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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