Markets for Information Goods

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2024-10-14 08:30:04

Much has been written about the difficulties that ``information'' poses for neoclassical economics. How ironic that ICE--information, communication, and entertainment--now comprises the largest sector in the American economy. If information poses problems for economic theory, so much the worse for economic theory: real markets seem to deal with information rather well.

This paradox is the central theme of this essay: information, that slippery and strange economic good, is, in fact, handled very well by market institutions. The reason is that real markets are much more creative than those simple competitive markets studied in Econ 1. The fact that real-life markets can handle a good as problematic as is a testament to the flexibility and robustness of market institutions.

Let us first seek a general characterization of the ICE economy. The basic unit that is transacted is what I call ``information goods.'' I take this to be anything that can be digitized--a book, a movie, a record, a telephone conversation. Note carefully that the definition states anything that can be digitized; I don't require that the information actually be digitized. Analog representations, of information goods, such as video tapes, are common, though they will likely become less so in the future.