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1. Cost of producing information :
The information market has a special structure, because once the first copy is made, it costs almost nothing to reproduce it. It means there are large fixed costs of production and small variable costs of reproduction. That leads to economies of scale. Basically, the main component of the fixed costs is sunk costs, which are not recoverable after stopping the production. In addition, marketing and promotion costs are also very high for information goods because there is more competition to get the consumer’s attention. On the contrary, reproducing costs do not increase, whatever the number of copies. Those particularities offer great marketing opportunities.
2. Cost and competition :
The information market does not look like any other perfect competitive market with many buyers and sellers, generic products and price competition. Moreover commoditized information is a huge threat. It is always possible to find another information producer who can sell the same product cheaper and still make profit. Once other firms have sunk the costs needed to sell a product, competitive forces move the price toward marginal cost which is the cost of producing an additional copy.
Fortunately, two sustainable market structures are available for information goods to survive in this competitive environment:
1. The dominant firm model, where you probably don’t have the best product but you have cost advantages
2. The differentiated product model, where different firms produce the same kind of information but with different varieties. This structure is the most common one (films, television…)
Linked with these structures, the ...