Final Presentation submitted for submitted in partial fulfillment of the requirements for the course Information Technology in Business. The document explores basic characteristics of digital goods and the difference between public and physical goods.

1. Economics of
Digital Goods
BY - AAKASH KHANDELWAL (IPG 2012001)
ABV- Indian Institute of Information Technology and Management Gwalior

2. Digital goods
 Bit strings, sequences of 0s and 1s, which have economic value.
 They are not just technologies to improve productivity on the supply side
of an economy.
 Any copy of a digital good is the good itself.
 There is no distinction between an original and a copy

3. Kinds of Digital Goods
Kinds of digital goods Illustrations
Searchable databases Restaurant guides, phone books
Dynamic information Financial quotes, news
On-line magazine and newspapers International, national, regional; general and
special interest publications
Reports and documents Easy multiplication and indexing
Multimedia objects Music, video files, texts, and photos
Information services Offerings by travel agencies, ticket agencies,
stock brokerages
Software Off-the-shelf products, customized products
Interactive services On-line forums, chat rooms, telephone call,
games

4. Characteristics of Digital goods
 Non-Rival
 Infinitely Expansible
 Discrete
 Aspatial (weightlessness and spacelessness )
 Recombinant

5. Economic nature of digital
goods: how technology,
characteristics and
behavior interact.
 Digital goods are fully replicable (can be
copied without loss of quality or
information).
 The content of a digital good may be
such that its actual value can only be
fully realized once the good has been
consumed. Thus, in addition to being
public and durable, some digital goods
are also
experience goods. (music, films, books,
etc.

6. Public Good
 A product that one
individual can consume
without reducing its
availability to another
individual and from which
no one is excluded.
 Economists refer to public
goods as "non-rivalrous"
and "non-excludable".

7. Economic Properties of Digital Goods
– General Behavior
 Digital goods are indestructible or nonsubtractive, meaning that they are not
subject to wearing out from usage, which can often occur in the case of physical
products.
 Easily transmutable; manipulation of digital products is easier .
 Digital goods are easily and cheaply reproducible.
 Digital goods, especially information and content products, are often classified as
public goods. Public goods share two main characteristics: nonrivalry and
nonexclusiveness in usage.
 Nonrivalry is a product feature normally given in the case of digital goods due to
low costs and ease of reproduction. Nonexclusiveness is a feature of the legal
system.

8. Economic Properties of Digital Goods
– Cost and Production
 High fixed costs (first copy costs), dominated by sunk costs, and by low
variable and marginal costs.
 Digital goods can be copied at almost no cost and can be transmitted
with minimum delay to almost everywhere. This copying of digital
products at almost no marginal costs.
 Value Paradox: Only when products are well known and highly in demand
are they attributed a high value and the possibility of generating
revenues.
 Customers are only willing to pay for “scarce” products.
 Reinforced by limited editions and individualization of the copies (e.g.,
through watermarking) or other restrictive measures.

9. Digital goods are durable goods –
Introduction
 From durable to infinitely durable the media used to store digital goods are
durable but not infinitely durable.
 CDs and DVDs – high life expectancy
Floppy discs, hard-drive and tapes – low life expectancy
 This potential infinite durability is a particular characteristic of digital goods
and no other good in the economy, apart
from information and land, is thought to have such a property.
 Although the medium used to store and distribute a digital good is finitely
durable, the digital
good itself is potentially infinitely durable, provided that it is transferred onto
a new medium before the current one
fails.

10. Digital goods are durable goods –
Effects
 The immediate expected effect of such durability is a progressive
decrease of the demand.
 Durability and loss of market power
A Durable good may lead to a total loss of market power for the firms
producing it.
 The economic impact of the durability of digital goods
If the durability of digital goods cannot be reduced, consumers are likely to
expect a decrease in price and to defer their purchase.
Public nature of digital goods tends to aggravate the problem, since
consumers,
while they wait for prices to drop are, nonetheless, able to consume illegal
versions of the goods.
New versions of software and operating systems are released, making the
previous version obsolete and
pushing consumers to renew their purchase.

11. Digital goods are experience goods
 Experience goods are goods whose qualities cannot be determined prior
to purchase.
There are two circumstances in which a good is considered an experience
good:
 either when full information on the main attributes of the good cannot be
known without direct experience
 when the search for information about the main attributes is more costly
or difficult than experiencing the product directly.
 Examples - music, movies, software or books
 Digital goods are experience goods is not an intrinsic property of these
goods, but is, instead related to their content.

12. All durable goods can be considered as
experience goods, since the more a good
is durable, the more it is likely to be
regarded as an experience good by
consumers. Since digital goods are
infinitely durable, they can all be
considered as experience goods,
regardless of the nature of the content of
the good itself.

13. THANK YOU