Understanding the Challenges of the Digital Economy: The Nature of Digital Goods

This article investigates the economic nature and characteristics of digital goods. Such goods are, due to their replicability, shown to be public goods (albeit in an evolutionary way) and durable goods. Furthermore, the content of such goods, combined with their durability, makes them experience goods. While only one of these characteristics would be sufficient to create difficulties for producers and lead to market failure, this article demonstrates that each of the characteristics reinforces the other. The framework presented in the article is then applied to two important issues: The new trend of massive consumer piracy and the overall problem of value of digital goods.

Thierry RAYNA, Imperial College London

“the development of the digital economy, based on the digitalisation of previously existing goods and on the development of new purely digital goods. This technology has not only permitted the creation of many new goods or services, but has also dramatically changed the way an entire category of goods in the economy are created, produced, distributed, exchanged and consumed. Digital technology has caused a drastic decrease in reproduction costs and distribution costs (and even, sometimes, in initial production costs), thereby leading to important structural changes in the economy and potentially a global rise of social welfare, due to the increase in quantity, quality and variety of goods and services available in the economy. “

“the benefits created by digital technology, in terms of distribution and reproduction costs, have been brought to the economy as a whole, thereby allowing the consumers to reproduce, distribute and exchange digital goods (virtually) without incurring any cost. The overall effect on the economy of digital technology is, thus, ambiguous.”

“because of their digital nature, digital goods are fully replicable (can be copied without loss of quality or information). This results in the following fundamental economic characteristics: digital goods are public and durable. These two characteristics are important, since they are known, in the literature, for the loss of market power they induce for the firms that produce such goods and for the market failure they may entail.” Which drives business models that don’t rely on the inherent value of the goods themselves.

“The content of a digital good may be such that its actual value can only be fully realised once the good has been consumed. Thus, in addition to being public and durable, some digital goods are also experience goods”

“A good is non-rival in consumption if the consumption activity of each consumer does not decrease the quantity of good available in the economy. A good is non-excludable if no one can be prevented from consuming it.”

“It is important to note that digital goods may seem, at first, rival in consumption: if a CD is used by a consumer, this particular CD is no longer available for the consumption of other consumers and the consumption activity of one consumer, indeed, reduces the number of units available for other consumers. However, there is rivalness only as far as the medium used to distribute the digital good (floppy disc, CD, DVD, etc.) is concerned, and not the digital good itself. The medium is indeed unique: if a consumer is using it, then the plastic component referred to as “CD” cannot be used at the same time by another consumer. The digital good itself (i.e. the binary code of the software, music file, etc.) can be replicated on another medium for a small (often negligible, cost). While rivalness exists if a consumer borrows a CD from another consumer, it is not resent if the digital good is copied instead, as both consumers can enjoy the same unit of good at the same time. Since digital goods can be copied without any loss of quality or information and are, in general, independent from the medium used to distribute them (the good matters, not the medium), they can be considered as non-rival.”

“The main difference between digital goods and the other traditional public goods is that the producers of digital goods always retain the ability to directly exclude consumers.”

“…since digital goods can be replicated, anybody owning a digital good is a potential supplier of this good. Thus, once the first unit of the good has been sold, the producer starts losing control over the production of the good and part of its power to exclude consumers. As the producer does not have the ability to exclude consumers indirectly, the more the good spreads among consumers, the less it is possible for the producer to actually exclude anybody from the consumption of the good.”

“only the first unit of a digital good produced is actually excludable”