Intellectual Property and Pricing

Today a different kind of IP here on IP Inferno, although I believe that the issues confronting our creative industries are parallel and related to those that confront the technology industry. There is an ongoing debate amongst a set of thinkers on the relationship of PRICE to COST, in particular as applied to products that are largely (or entirely) made up of this flimsy stuff we call intellectual property. When your product is bits and not atoms, should costs of manufacturing and distribution have anything to do with price?

Solveig Singleton addresses this issue in a recent blog post on IP central entitled "The Marginal Cost Fallacy, Again" in which she argues that the idea that marginal cost would have anything to do with pricing is an academic notion, not intended to have any application in the real world. This is in response to an interview with Defective By Design, an anti-DRM activist organization. In the interview, the ant-DRM advocates ask:

When we live in a age where all digital works of art and all human knowledge can be transferred at (next to) zero cost, and where the cost of making one more copy is zero. Is it right to be building digital fences and digital handcuffs around this art and knowledge?

Solveig sees in this an argument that prices for IP should relate to costs and points out that this connection is not a necessary connection.

But the component of the equation which appears to be lacking in Solveig's observations is the willingness of a consumer to pay a given price. The market's willingness to pay IS a critical component and marginal costs finds its way back into the (real world) calculation via this component.

Lets do some context setting -- cassette tapes provided consumers with a vehicle for duplicating recordings 30 years ago and yet they had a nominal impact on pricing for record albums. Why? Consumers still had to purchase cassettes AND invest their own time and energy into duplication. When a consumer evaluated the cost (in real dollars and time) of duplicating an album, consumers whose time was worth something would opt to buy the album. Consumers whose time was not worth anything likely had little disposable income anyway, and thus wouldn't have bought the album.

But with marginal cost approaching zero for electronic duplication - both in real dollars and tims - the consumer's calculation is quite different. Now it really doesn't make economic sense to purchase the album. Thus you are left with the flimsy bulwark of legal protection for IP to entice a consumer to pay for the album.

When economic incentives are out-of-whack with business practices, does it make sense to do as the RIAA has done and enforce those business practices through legal efforts? Or does it make sense to change those business practices?