economics of information production january 20, 2011 gueorgui balaktchiev

Economics of Information Production

January 20, 2011Gueorgui Balaktchiev

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.

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.

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.

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.

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.

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.

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).

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);

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.

Benefits of versioning

• Expanding the client base;• Strengthening client relationships;• Will not cannibalize the premium service

market;• Improves market transparency.

The three steps of versioning

1. Determine the features which will be highly valuable to some customers but of little value to others;

2. Create the right number of versions;

3. Set the right prices for each version.