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Chapter 10 E-commerce: Digital Markets, Digital Goods 411

TABLE 10.3 DIGITAL MARKETS COMPARED TO TRADITIONAL MARKETS

DIGITAL MARKETS TRADITIONAL MARKETS
Information asymmetry Asymmetry reduced Asymmetry high

Search costs Low High
Transaction costs Low (sometimes virtually nothing) High (time, travel)

Delayed gratification High (or lower in the case of a digital good) Lower: purchase now
Menu costs Low High

Dynamic pricing Low cost, instant High cost, delayed

Price discrimination Low cost, instant High cost, delayed
Market segmentation Low cost, moderate precision High cost, less precision

Switching costs Higher/lower (depending on product High
characteristics)

Network effects Strong Weaker
Disintermediation More possible/likely Less possible/unlikely

Digital Goods
The Internet digital marketplace has greatly expanded sales of digital goods.
Digital goods are goods that can be delivered over a digital network. Music
tracks, video, Hollywood movies, software, newspapers, magazines, and books
can all be expressed, stored, delivered, and sold as purely digital products.
Today, all these products are delivered as digital streams or downloads, while
their physical counterparts decline in sales.
In general, for digital goods, the marginal cost of producing another unit is
about zero (it costs nothing to make a copy of a music file). However, the cost of
producing the original first unit is relatively high—in fact, it is nearly the total
cost of the product because there are few other costs of inventory and distribu-
tion. Costs of delivery over the Internet are very low, marketing costs often
remain the same, and pricing can be highly variable. (On the Internet, the mer-
chant can change prices as often as desired because of low menu costs.)
The impact of the Internet on the market for these kinds of digital goods is
nothing short of revolutionary, and we see the results around us every day.
Businesses dependent on physical products for sales—such as bookstores,
music stores, book publishers, music labels, and film studios—face the possibil-
ity of declining sales and even destruction of their businesses. Newspapers and
magazines subscriptions to hard copies are declining, while online readership
and subscriptions are expanding.
Total record label industry revenues have fallen from $14 billion in 1999, to
$5.4 billion estimated in 2012, a drop of 61 percent, due almost entirely to the
decline in CD album sales, and the growth of digital music services (both legal
and illegal music piracy). On the plus side, the Apple iTunes Store has sold 16
billion songs for 99 cents each since opening in 2001, providing the industry
with a digital distribution model that has restored some of the revenues lost to
digital music channels. Since iTunes, illegal downloading has been cut in half,

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