Some Economic Aspects of Information
Information as a commodity has some specific, intertwined economic attributes that differentiate the markets of information from traditional ones.
- Increasing Returns to Scale
- Information Access and Processing
- Excludability and Rivalry of Information Use
- Joint Production & Asymmetric Distribution
Increasing Returns to Scale
In the context of production, information is
characterized by increasing returns to scale since the
same information once produced and used can be used again
and again regardless of the scale of production. For
instance, despite the circumstance that an addition of
conventional inputs leads to proportionally increasing
outputs, an addition of another unit of the same
information adds nothing.
A specific amount of units of information is used as
input factor independent of the scale of production. This
results in increasing returns to scale (Wilson, 1975).
However, without properties of convexity, increasing
returns to scale have implications on the functioning of
the price system to reach a competitive equilibrium.
Since the same unit of information can be used again
and again by the same or by a different user, the cost of
information production is not dependent on the scale on
which the information is used (Arrow, 1962, 1996, 1999;
Lamberton, 1996). Since there are generally relative high
fixed costs of establishing an economic unit for the
production of information and the marginal cost of
providing a unit of information is far less than the
average costs of information production, many types of
information have large scale economies. It is less costly
when a single supplier provides the commodity. The
consequence is characterized by natural monopoly aspects
and markets may fail to produce them on an efficient
level (Shapiro, 1983; Shapiro & Varian, 1999).
The existence of economics of scale in production
involve significant indivisibilities in production.
However, with indivisibilities prices do not longer
detect optimality (Scarf, 1994).
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Information Access and Information Processing
In many cases, information pertains to the object of
economic exchange but also to the context of the object,
for instance, to the quality level of a traded product.
Therefore, the use of the core information in a
purposeful way requires a sufficient amount of context or
background knowledge of the information recipient that is
necessary to process, understand, and evaluate the core
information.
For instance, the information about specific amounts
of company emissions only has a value if the recipient
has a certain relevant knowledge of the evaluation of the
environmental impacts of those emissions. The limitations
and uncertainties of environmental knowledge, the limited
endowment of environmental knowledge, time, personnel
resources, or other capabilities necessary for the
sufficient acquisition and application of this knowledge
leads to problems of information access and processing
not only on the sides of the information recipients but
also on the side of the transmitters, or the companies
respectively.
As Arrow (1979) argues, the acquisition of data by an
individual requires information costs, in particular time
and effort. The possibility of reducing these information
costs is limited by the ability of the individual’s
assimilation of information that is itself constrained by
the capability of information-processing.
Related to this, if information is considered as an
economic commodity, information itself has attributes of
an experience good. Individuals intending to obtain
information either by purchase or production cannot know
in advance the costs and benefits of certain types of
information before they have acquired it. To ex ante
maximize the net returns of information or knowledge
acquisition, they would need this information. Without
social contrivances (e.g., reputation or information
reviewers), individuals cannot know prior to acquisition
if the information is useful and valuable. This is only
possible during, or after the use of the information.
This situation is also referred to as ‘information
paradox’ (Arrow, 1962).
Furthermore, the costs incurred to obtain the
information are ‘sunk costs’; once spent they
have no relevance to the extent to which the information
is used. As a result, individuals only bear the costly
acquisition of information until experiences stop them
from wasteful expenditures. Therefore, it is likely that
information is not obtained to the extent which would be
necessary for complex operations (Kasper & Streit,
1998, p. 54-56).
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Excludability and Rivalry of Information Use
Knowledge and information are often seen as a public
good because many types of knowledge can be used jointly
and provides externalities to other individuals. However,
whether information should be seen as a public rather
than a private good depends on the type of information
and its legal treatment (Lamberton, 1996).
Since in certain cases the use of information does not
diminish its usefulness for other individuals, many types
of information have a non-rival character. However,
rivalry in information use may exist when the first or
sole possessor of the information has a competitive
advantage from the exclusive use of the information, such
as trade secrets, business knowledge, or company-specific
technological knowledge (Mackaay, 1990).
Regarding to the second public-good attribute,
excludability in information use can, in principle, be
established by secrecy (Mackaay, 1990). Furthermore, for
some types of knowledge intellectual property rights like
patents, copyrights, or company and trade secret laws can
establish (sometimes imperfect) excludability.
Excludability offers the producers of knowledge
economic rents such as monopoly profits to set incentives
for the production of knowledge (Hirshleifer, 1973;
Dasgupta & David, 1994; Arrow, 1996). These
conditions are particularly relevant to the technical or
organizational knowledge of companies. The private good
attribute may also come from the fact that these types of
information are highly individualized (Mackaay, 1990).
Related to this, excludability is established by the
cost of information access and processing for outsiders,
that are (opportunity) costs such as previous knowledge,
skills, or time resources necessary for individuals to
acquire, process, and understand the released information
(similar Kennedy, Laplante & Maxwell, 1994). These
types of information can be seen as private goods unless
the producers deliberately release them or legal
requirements force companies to publicly release the
information.
After the voluntary or enforced release of
information, the characteristic of information may
resemble more of a public good. Excludability is
particularly difficult to maintain for information which
have the purpose of being shared with others to obtain
the accumulation of knowledge (Mackaay, 1990).
Excludability is also hampered by the low costs of
transmitting and copying of the relevant information
which makes it difficult for the information producer to
appropriate the benefits of the knowledge production
(Arrow, 1962).
In contrast to the company-specific technical and
organizational knowledge, scientific knowledge has more
of the characteristics of a public good because it is
often costly or socially undesirable to exclude its use.
The value of many types of scientific knowledge is not
depleted by joint use and, in fact, often cumulatively
adds to its value (Dasgupta & David, 1994; Stephan,
1996; Callon, 1994).
Within a market mechanism, producers of scientific
knowledge are not sufficiently able to appropriate the
value of their produced knowledge because they cannot
establish excludability (the ‘free rider’
problem). To address the resulting underproduction of
scientific knowledge, direct governmental involvement or
priority incentive schemes have to be established. For
instance, the scientific incentive scheme of priority
induces fast disclosure of scientific knowledge by
allowing producers to secure the (informal) intellectual
property rights of their discoveries and inventions
(Dasgupta and David, 1994).
Positive externality emerges when some market
participants acquire information (Hirshleifer, 1971).
With the help of an information improvement the market
participants make better economic decisions, such as
purchasing lower-price or higher-quality products, and
the entire market improves by better discipline (Salop
& Stiglitz, 1977). Uninformed participants may act as
a ‘free rider’ of the market improvement and
the private demand for this information is too low
(Shapiro, 1983).
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Joint Production and Asymmetric Distribution
Some types of private company information are the
result of the joint production or use of the object to
which the information refers. The types of information
arise as by-products of economic activities (Arrow,
1962). For example, producers can obtain insights about
the material and energy flows to and from their
production processes. This implies that in most cases
companies are the least-cost producers of the relevant
information.
However, the joint production also has the effect that
a situation of asymmetrically distributed information
emerges because the producer of the relevant goods and
services obtains an information advantage (e.g.,
Ballwieser, 1993).
This information advantage together with the high
measurement costs leads to situations of ‘asymmetric
information’ (Barzel, 1995) which may require
particular institutional arrangements (for example,
certification) to avoid market inefficiencies (Shapiro,
1983).
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References
Arrow, Kenneth J. (1962), ‘Economic Welfare and
the Allocation of Resources for Invention’, in
Richard R. Nelson (ed.), The Rate and Direction of
Inventive Activity: Economic and Social Factors, National
Bureau of Economic Research, Conference Series,
Princeton: Princeton University Press, pp. 609-625.
Arrow, Kenneth J. (1979), ‘The Economics of
Information’, in Michael Dertouzos & Joel Moses
(eds.), The Computer-Age: A Twenty-Year View, Cambridge,
MA: MIT Press, pp. 306-317.
Arrow, Kenneth J. (1996), ‘The Economics of
Information: An Exposition’, Empirica, Vol. 23, No.
2, pp. 119-128.
Arrow, Kenneth J. (1999), ‘Information and the
Organization of Industry’, in Graciela Chichilnisky
(ed.), Markets, Information, and Uncertainty. Essays in
Economic Theory in Honor of Kenneth J. Arrow, Cambridge:
Cambridge University Press, pp. 19-25.
Ballwieser, Wolfgang (1993), ‘Information und
Umweltschutz aus Sicht der betriebswirtschaftlichen
Theorie’, in Gerd Rainer Wagner (ed.),
Betriebswirtschaft und Umweltschutz, Stuttgart:
Schäffer-Poeschel, pp. 250-264.
Barzel, Yoram (1995), Transaction Costs and Contract
Choice, mimeo, Seattle WA: University of Washington.
Callon, Michael (1994), ‘Is Science a Public
Good? Fifth Mullin Lecture, Virginia Politec Institute,
23 March 1993’, Science, Technology, and Human
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Dasgupta, Partha & Paul A. David (1994),
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Hirshleifer, Jack (1971), ‘The Private and Social
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Kennedy, Peter W., Benoit Laplante & John Maxwell
(1994), ‘Pollution Policy: the Role of Publicly
Provided Information’, Journal of Environmental
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Kasper, Wolfgang und Manfred E. Streit (1998),
Institutional Economics. Social Order and Public Policy,
Cheltenham UK and Northampton MA: Edward Elgar.
Lamberton, Donald M. (1996), ‘Introduction:
‘Threatened Wreckage’ or New Paradigm?’,
in Donald M. Lamberton (Ed.), The Economics of
Communication and Information, Cheltham UK and Brookfield
US: Edward Elgar, pp. xiii-xxviii.
Mackaay, Ejan (1990), ‘Economic Incentives in
Markets for Information and Innovation’, Harvard
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867-909.
Salop, Steven & Joseph E. Stiglitz (1977),
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Competitive Price Dispersion’, Review of Economic
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Scarf, Herbert E. (1994), ‘The Allocation of
Resources in the Presence of Indivisibilities’,
Journal of Economic Perspectives, Vol. 8, No. 4, pp.
111-128.
Shapiro, Carl (1983), ‘Consumer Protection Policy
in the United States’, Journal of Institutional and
Theoretical Economics – Zeitschrift für die gesamte
Staatswissenschaft, Vol. 136, No. 3, pp. 527-862.
Shapiro, Carl & Hal R. Varian (1999), Information
Rules: A Strategic Guide to the Network Economy, Boston,
MA: Harvard Business School Press.
Stephan, Paula (1996), ‘The Economics of
Science’, The Journal of Economic Literature, Vol.
34, No. 3, pp. 1199-1235.
Wilson, Robert (1975), ‘Informational Economics
of Scale’, Bell Journal of Economics, Vol. 6, No. 1,
pp. 184-195.
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