From information goods to information services

by Sebastian Benthall

Continuing to read through Information Rules, by Shapiro and Varian (1999), I’m struck once again by its clear presentation and precise wisdom. Many of the core principles resonate with my experience in the software business when I left it in 2011 for graduate school. I think it’s fair to say that Shapiro and Varian anticipated the following decade of  the economics of content and software distribution.

What they don’t anticipate, as far as I can tell, is what has come to dominate the decade after that, this decade. There is little in Information Rules that addresses the contemporary phenomena of cloud computing and information services, such as Software-as-a-Service, Platforms-as-a-Service, and Infrastructure-as-a-Service. Yet these are clearly the kinds of services that have come to dominate the tech market.

That’s an opening. According to a business manager in 2014, there’s no book yet on how to run an SaaS company. While sure that if I were slightly less lazy I would find several, I wonder if they are any good. By “any good”, I mean would they hold up to scientific standards in their elucidation of economic law, as opposed to being, you know, business books.

One of the challenges of working on this which has bothered me since I first became curious about these problems is that there is not very good elegant formalism available for representing competition between computing agents. The best that’s out there is probably in the AI literature. But that literature is quite messy.

Working up from something like Information Rules might be a more promising way of getting at some of these problems. For example, Shapiro and Varian start from the observation that information goods have high fixed (often, sunk) costs and low marginal costs to reproduce. This leads them to the conclusion that the market cannot look like a traditional competitive market with multiple firms selling similar goods but rather must either have a single dominant firm or a market of many similar but differentiated products.

The problem here is that most information services, even “simple” ones like a search engine, are not delivering a good. They are being responsive to some kind of query. The specific content and timing of the query, along with the state of the world at the time of the query, are unique. Consumers may make the same query with varying demand. The value-adding activity is not so much creating the good as it is selecting the right response to the query. And who can say how costly this is, marginally?

On the other hand, this framing obscures something important about information goods, which is that all information goods are, in a sense, a selection of bits from the wide range of possible bits one might send or receive. This leads to my other frustration with information economics, which is that it is insufficiently tied to the statistical definition of information and the modeling tools that have been built around it. This is all the more frustrating because I suspect that in advanced industrial settings these connections have been made and are used with confidence. However, it had been slow to make it into mainstream understanding. There’s another opportunity here.