Strategy for Information Markets/Durable goods

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A durable good is a good which lasts for a long time, so does need to be purchased often. It can be used many times before it needs to be replaced. A diamond ring is a durable good because it can be expected to last a very long time, without wearing out or needing to be replaced. In contrast, a non-durable good (such as a sandwich) does not have a long life full of many uses. Economists such as Ronald Coase have pointed out that a monopolist selling a durable good is in a harder position than a monopolist of non-durable goods because with durable goods, the monopolist is essentially competing with itself over time[1]. A monopolist who sells a fine oak desk this year reduces the demand for a similar desk next year.

Government and news reporting which uses the expression "durable goods" is usually about things like refrigerators, cars, factory machines, and the like. However, an information good in a digital format can be more durable than a machine built to last 20 years. In this chapter, we'll consider particular issues for information goods[note 1]. For this chapter, you will need to understand various background material on time, including backward induction and discounting.

Durable goods provide a flow of services[edit]

In studying the nature of durable goods, it is frequently useful to describe the consumer as consuming a flow of services over time from the good. Rather than considering a consumer as consuming a CD, we can consider the consumer as consuming the service of listening to the CD this week, next week, until the consumer loses interest, technology makes the CD obsolete or the CD breaks somehow.

When modeled this way, we assume the consumer places a value for consuming the service in each period. The consumer's willingness to pay for a durable good will be the present value for them of this flow of services.

How far can the idea of durability extend?[edit]

A ticket to a first-run movie has the durable quality that once someone has seen the film that person is unlikely to buy a second ticket. Thus, the movie company will find the demand for tickets on any rerelease of the film to be negatively related (ceteris paribus) to the number of viewers who saw the film when it first came out.[2]

The quote above shows that sometimes "durability" is a matter of consumer tastes rather than the nature of the product. Consider a piece of music versus a movie. Both are information goods, which can be delivered on a CD/DVD or via download, for rental or sale. However, a piece of music is likely to have a lot of value in repeated listening while a movie will probably have less value in repeated watching[note 2]. In some sense, you could say that a movie watched in once September might still be delivering a flow of services in November when the viewer can still remember what they enjoyed about it. In any case, from the point of view of the firm trying to profit from the good, a single viewing of a movie may be thought of as the sale of a durable good, while a single listen to a song may not. So, you can listen to newly released songs on broadcast radio, but not view newly released movies on broadcast television.

We shouldn't forget, however, that there is more than durability going on in the difference between second-run and first-run movies. Movie studios use time-delay as an important too of price discrimination as well.

Costs associated with durable goods[edit]

Because durable goods last for a long time they tend to be more expensive to both manufacture and purchase while non-durable goods have a shorter life span and usually cost less to produce and procure. The exchange for between high durability and marginal cost presents sellers with a tough question Just how durable should they make the product? To make a product more durable it requires more thorough work and the use of superior materials increasing the marginal cost of the manufactured good. The naturally high price of durable goods causes them to generally be items of investment, this also makes it more likely that individuals are able to rent them where non durable goods are usually items of consumption and therefore not necessarily rentable.

Sometimes companies tend to avoid producing products that are perfectly durable because they will lose a consumer's business after that transaction. It is in the company's interest to make products that are durable but need to be replaced over time. A consumer wants a product that is durable and will get a lot uses out of it. This is where the balance between durability and marginal cost must be made, the item must be durable enough to entice purchase so that marginal costs may be covered.

However, the cost structure mentioned does not pertain to information goods. Information goods do not need a long physical life like manufactured goods do therefore the above information does not pertain to that market.

Durable information goods[edit]

When discussing durable information goods, an example would be a book because this item would be able to last a long time and many people could obtain the information. This book can be passed down to many generations in a family. An even better example of an information durable good is an online website. The online website can last for many years for consumers to read as long as it is not deleted by the creator or shut down. Not all information goods are durable. An example of a non durable information good is a stock tip. This tip is considered to be an information good but will only be good for a certain period of time since the market is always changing. More than likely, a consumer would not be able to use this stock tip in the future. Therefore the good is non-durable.

One important thing to note about durable information goods is that their value may deteriorate, but the information is still durable. The value of news decreases with time because the information, while being durable, does tend to lose importance and the interest of others as its currency depreciates. Value deterioration can also be seen in software due to compatibility, as systems change and require different or newer software the other is left with less value. Another example of deteriorating value is found in popular arts, as common taste in particular popular arts lessens so does the value. Popular arts may consist of things such as video games, an example of the loss of value within the video game market pertaining to piracy and resale and how PlayStation and Xbox are trying to fight it is given below.

The ability to buy pre-owned computer and console video games has caused a threat to the industry. Because those who buy the game in the first few days possibly have the power to pirate the contents of the game and then resell it at lower than market price the value of the game and its contents goes down. Resale has taken the largest hit on the value of single player games given that taste has swayed towards multi-player in addition to the mentioned piracy. Game designers are even claiming that the repercussions from piracy and resale include the increase of game prices since the game makers are only receiving mass amount of profits from the first day of sales because they are not given any share of the resells.

Depreciation rate for business software[edit]

Depreciation Rate is defined by the percentage rate at which an asset devalues. Furthermore, this is computed by dividing the depreciable cost of the asset by the number of years in the asset's estimated productive or useful life.

Business Software is important for any organization or company. Any individual or CEO might buy business software to improve the efficiency of the business and maintain data collected. This software helps cut costs and speeds up any production outputs. Although business software will be a durable good for many years it will slowly depreciate it's value due to fast pace technology advancements. Over time companies will need to update or replace their software when it is not compatible with their current business.

One of the more popular Business Software programs is: Microsoft Office which contains multiple uses such as Power Point, Excel, Word, and many others that Business owners use every day. This software will have many useful years but will be depreciate in the future due to technology advances and companies will want higher technology to improve their efficiency.

Notes[edit]

  1. Several things which are often emphasized in studying the strategy of a durable-goods monopolists are less relevant for information goods. For example, a monopolist of a physical good may take pains to commit to limited production, but with digital copying of information goods, that isn't a very viable strategy. Similarly, a manufacturer of airplanes might consider the increased marginal cost of making a more durable plane which will have greater overall demand, but greater durability. Such trade-offs aren't very relevant for a monopolist of an information good.
  2. This is a generalization, of course. Some people like to watch some movies repeatedly. This is particularly evident to parents of young children who learn to despise their kids' favorites.

References[edit]

  1. Coase, Ronald (1982). ""Durability and Monopoly"". Journal of Law and economics 15: 143-149. http://www.jstor.org/stable/725018. 
  2. Bulow, J.I (1982). ""Durable-goods monopolists"". The Journal of Political Economy 90 (2): 314-332. http://www.jstor.org/stable/1830295.