Economics of Information Production

1. Economics of Information Production January 20, 2011 Gueorgui Balaktchiev

2. What are we going to discuss? • Compare information products with legal products from an economics perspective; • The structure of the markets in which information and legal products are traded; • The use of versioning.

3. Characteristics of information products: demand • An experience good = clients don’t know what it’s worth until they have actually tried it; • Not homogeneous = highly substitutable products, but not perfect substitutes.

4. Characteristics of information products: supply • Large fixed costs of production and small variable costs; • Fixed costs tend to be sunk costs, i.e., not recoverable if production is halted.

5. Characteristics of information products: supply • Information producers have huge capacity – millions of copies can be made easily and marginal cost does not increase; • Law firms have limited capacity and marginal cost can increase once full capacity is reached.

6. Differences between legal products and information products Legal products are usually bespoke and there is a large component of service; Limited excess capacity that can be used to create “free versions” of legal products.

7. Characteristics of information products: market structure • Monopolistic competition • Differentiated products, but free entry and exit; • Each firm with a differentiated product has market power – it is the sole producer of its own brand of product; • Firms operate with excess capacity. • Oligopoly • only few firms account for most or all of production with high barriers to entry. • Both can result in higher prices than under perfect competition, but there can be some benefits, e.g., diversity.

8. Segments of the legal services market • Segments operating under perfect competition where brand differentiation is not significant; • Segments operating under monopolistic competition (different brands, but easy to establish expertise, experience, capacity and reputation); • Segments with very strong brands where entry is difficult (highly specialized expertise or large investments required, e.g., international network and highest reputation).

9. Versioning the legal product/service • It can be perceived as an alternative method of pricing. It focuses on the value obtained by the customer. • A customer will purchase the product if economic value to the customer (EVC) is positive (EVC = Value to the customer – Cost of the product);

10. Versioning the legal product/service • Charging the same price for the same legal product results in lost income or makes you vulnerable to the competition; • To successfully charge different prices, the supplier has to modify the product.

11. Benefits of versioning • Expanding the client base; • Strengthening client relationships; • Will not cannibalize the premium service market; • Improves market transparency.

12. The three steps of versioning • Determine the features which will be highly valuable to some customers but of little value to others; • Create the right number of versions; • Set the right prices for each version.