Examining Digital Goods

An earlier piece Examining the Nature of Goods, discussed the classification of goods around the notions of exclusion and rivalry.  The brick and mortar era made it relatively easier to classify goods on this basis. Digital goods emerged on the horizon with the rise in the technology industry. The role of digital goods both in production, consumption and the impact has been swift, wide and deep.

Discussions on the nature of digital goods commence from an attempt in defining the good. One such authoritative attempt was by Danny Quah in 2002. For Quah, a digital good is a payoff-relevant bit-string, i.e., a sequence of binary digits, 0s and 1s. These combinations of zeroes and ones potentially impact the efficacy of an individual or an economy. Implied is digital goods is akin to a recipe. Each bit-string is encoded with economically valuable instructions influencing the payoff on both production and consumption. Thus as opposed to orthodox analysis of goods revolving around production, the digital goods emphasize the landscape of consumption too.  Besides, at this juncture, it is appropriate to include DNA and other bio-goods in the category of digital goods. DNA, RNA etc. too are economically encoded instructions in a bio-string generating payoffs in the functioning of a body of living organism.

Further Quah argues, for a good to be called a digital good, it must possess five distinct physiognomies.  They are non-rival, infinitely expansible, discrete, aspatial, and recombinant.  These idiosyncratic features merit deeper investigation.

Non rivalry indicates a use by one agent will not degrades it value and utility to another agent. As observed in the previous piece, the good possessing the quality of non-rivalry does not erode the quantity of consumption by a user for the mere fact somebody else is using simultaneously or sequentially. A webpage can be opened and viewed simultaneously by multiple users without the webpage owner having to produce multiple webpages. Implied the marginal production is zero for every user in the network. Software given its characteristic of concurrent usage is non rival by inborn nature.  However, non-rivalry doesn’t lead to non-exclusion.  Though, digital goods do possess non exclusion, they however can be designed to be excludable. Microsoft licensing its Windows operating system, newspapers restricting number of free page views etc. all reflect the attempt to exclude and thus transformation into club good.

To Quah, a good is infinitely expansible when it can be produced to infinity at zero marginal costs. Digital music and images, are being produced in large numbers. The large scale production entails zero marginal costs. Moreover the free redistribution of digital goods over the internet, easily send the music companies into a state of nervous anticipation.  Physical goods might have been expansible but had finite limit. Watching a cricket match in a stadium is expansible but determinate. Ditto for watching a movie at a theatre or a multiplex or attending a live music show maybe classical or popular. Yet the same time, when watched in digital medium, it demonstrates infinite expansibility. A cricket match on television is infinitely expansible at thousands watch with marginal costs of production being zero. The rise of online music industry from iTunes to Rhaspody or earlier with Napster all owe to the typology of digital goods being infinitely expansible. So is the success of platforms like Netflix.

Digital goods being discrete imply an indivisibility of the goods. There cannot be half digital good. A MP3 file comes in whole and cannot be divided into parts. However, in practice the division into parts leads to a new digital product itself which shall be taken for discussion at a later stage.  Yet it would be worth remembering there is nothing called a half idea, half bit string or half DNA etc.

Since the digital goods are not available as fractions, the significance rests in the instantiation of the goods.  Implied is digital goods require huge investment to create the first copy of the good. Yet reproducing multiple copies virtually costs zero or is negligible. The cost of producing a movie might run into crores yet reprinting the reel is virtually negligible. To produce an operating system, firms like Microsoft, Linux, Google, Apple etc might have entailed billions of dollars, once the first CD or DVD of OS is out, it hardly costs anything to replicate in thousands of computers and mobile devices around the universe. The music industry’s grouse against online pirate platforms revolves around instantiation. The industry argument rests the production of music runs into millions if not more and the pirate platforms circumventing barriers of entry and distribution reproduce for free. The relatively zero price distribution apparently takes away the revenues from the industry leaving it little incentive for innovation and reproduction.  Knowledge industries without exception are in-built on the premise of instantiation. New pricing models like equating marginal revenue to marginal utility are being viewed as an answer to the above.  All the three selves described thus far exhibit increasing returns with allusion to the output.

Further digital goods, being aspatial, are nowhere and everywhere in unison.  Digital goods are copies so is their communication to all other parts of the world. A pdf file on a laptop is a digital good. When it is copied onto another laptop, the copy too becomes a digital good in itself. A file stored in remote server on the cloud is a digital good so are the numerous copies being downloaded across systems through the world.

Recombinant in essence means the production of new digital goods by merging antecedents and further having features absent in the original, parent digital goods.  In fact, pharmaceutical industry focuses on recombinant nature of DNA in its attempts to produce miracle cures. Emergence of gene editing etc is because of the property of recombinant. Similarly the software products when tinkered with gives rise to new products.

All digital goods are either robust or fragile. Robust are those goods which can be modified or tinkered for specific purpose with ultimate objective being restoration of the original good. Many files are zipped for easy transfer to other locations and consequent restoration of the original file. Fragile goods are those which at slightest contamination becomes dysfunctional. An operating system with slight tampering becomes useless.

Understanding of digital goods is essential for insights into the functioning of the emergent economy dominated by digital presence with physical often being a complement. The future would perhaps increasingly see many physical goods as manifestations of the digital and physical being embedded of the digital.