29 November 2019

How to Price Information Goods that Exert Externalities

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    Information plays an ever more important role in modern economies. The growing information industry comprises not only companies that produce information goods (IGs) and services but also companies that process and transmit information.  

     

    Nowadays, IGs are mostly disseminated in digital form through transmission channels in communication networks. IGs possess the following distinctive properties: free replication, indivisibility, irreversibility of trade and external effects. Free replication means that everyone can replicate IGs at essentially zero cost. Indivisibility means that an individual can benefit only from one unit of the IG and irreversibility implies that a buyer can’t return an IG. Moreover, IG exert externalities when others are affected when somebody else acquires this IG. For the purpose of our analysis, we also assume that IGs, in their digital form, diffuse sufficiently fast to all prospective consumers.  

     

    To investigate the impact of these properties on IGs prices, we develop a model of bilateral trade in networks, if the agents can only trade when they are connected. Our analysis yields the following main insights: firstly, information diffuses to all players that are connected in the network. Secondly, the order in which information trades occur has no impact on information prices. We also develop a recursive algorithm to calculate the unique prices of IGs for any given network. Furthermore, in an application to citation networks, we derive a measure of intellectual influence of a cited work that we treat as an IG.  

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    We exemplify our results in three externality regimes: positive, negative and no externalities. The first regime arises when, for example, a firm uses advertising to influence prospective customers. If a consumer buys the advertised product, the ad exerts positive externalities on the firm. A negative externality of information occurs, for example, when a data broker can sell some relevant market information to competing firms and each of these firms is harmed when its competitors acquire this information. Finally, a recording of an opera performance is an example of an IG with (typically) negligible externalities.  

     

    Our model has many prospective applications to copyright and licensing regulations, internet-based commerce (e-commerce), intelligence networks or data brokerage. We show, in particular, that an optimal copyright provision may depend on externalities exerted by buyers on the creator of an IG. Furthermore, our examples suggest that in markets, where firms impose negative effects on their competitors by acquiring information, these effects are not internalised. If sufficiently strong, they can cannibalize any benefits from information acquisition. Finally, our results suggest that direct marketing, where businesses communicate directly with customers, is a more stable arrangement than mediated marketing. 

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