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The intellectual property, copyright, DRM, and digital piracy thread
So we have had threads on bits of this broader topic several times now, but I can't find a single overarching thread so I'll just start a new one.
I just wanted to post some thoughts I had on the issue. We just went over rival and excludable goods in econ, and I finally put two and two together:
| rival | non-rival | |
| excludable | purchasable physical media | purchasable digital media |
| non-excludable | freely-distributed physical media | freely-distributed digital media |
...so, basiacally, excludability translates to whether something is free or priced, and rivalry translates to whether something is physically or digitally distributed.
(BTW, "excludable" in economics refers to whether it's possible for anyone to get something if it were available for at least some people to get; it doesn't account for depletion of availability. Even if you have a million hamburgers, if you're not giving them away for free, then they are excludable goods.)
Of course, these distinctions aren't really binary. For example, a game on a CD-ROM could be less rival if one could copy the game to one's computer and run it from hard drive. An item could also be rival or non-rival based on multiple ways of conceptualizing the situation -- a game purchased on Steam does not prevent someone else from purchasing it (non-rival) but (assuming the game is single-player and has CEG DRM) the game cannot be played by someone else without you not playing it yourself (making it rival). Though I think this last example is a little different...
There's also the possibility of availability (including availability of trusted sources) influencing an item's excludability/rivalry. For example, it may be possible to torrent a game, but maybe you don't know what torrents are virus-free and actually contain the game data, so the game may be theoretically non-excludable, but it is effectively excludable to you since you need to have a certain something (such as in this case knowledge of how to find an appropriate torrent) to get to it. Similarly, maybe you could theoretically copy the disc data from a friend, but you don't have a friend who has a disc of the game.
A sidenote about Steam and its features: The way those fit into an economic model, I think, is that they are basically expected (by their supplier, Valve) to be additional utility for their products. For example, they presume (and accurately so, it seems), that a game by itself is worth less than the same game plus wrapper DRM plus a "hit F12 and upload later to share a screenshot" feature plus an automatic game files organizer.
Anyway back on that table I put up earlier: That bottom-right category, non-rival and non-excludable goods, is commonly called "public goods". The one to the left, rival but non-excludable goods, are sometimes called "common goods". Both of them have well-known issues of over-demand associated with them; common goods are afflicted by the "tragedy of the commons", and (more relevantly for digital piracy) public goods are also perenially under-supplied in a free (but thus imperfect) market. So one could start arguing that digital piracy turns an excludable good into a non-excludable good, which is then undersupplied.
However, the market is quite a bit more complicated than that. First, the market for games is not a perfect market even without piracy -- there is a notable though incomplete amount of monopoly power that suppliers have. The product ultimately only comes from one publisher, and even though people talk about games being variably similar to other games of the same genre, ultimately, no two games are alike, and furthermore, particularly well-regarded or popular games tend to be particularly non-substitutable. If we talk about distributors, sure, they could have slightly different prices, but even then it's an oligopoly. Furthermore, there is incomplete information: one cannot know how much one likes a game until one has played it, but once one has played it, it is generally seen as having served its purpose and is likely now worth less to the player than it would have been had the player somehow had fore-knowledge of how much utility 'ey would have gotten out of it. Finally, a game freely distributed can nevertheless have a positive net value to the developer or publisher, especially through word-of-mouth demand generation, though this effect is much smaller for things that have already approached a saturation demand from a heavy marketing campaign. That said these last two reasons are why demos are a thing. (That said, demos could potentially be unsuggestive of the rest of the game, in a good or bad way, so maybe it doesn't solve the information asymmetry completely...)
I wonder how Steam-style sales come into all of this. It seems that, with physical media, you often have the initial release price, which is the highest price (often $50 to $60 for a top-of-the-market or "AAA" game in the United States), and then after a while, the price is lowered, be it to capture more demand (in that downward-sloping trianble to the right of the original market-clearing quantity demanded, I think, on a typical demand/supply graph) or to sell off excess stock. At this time, more people buy it. The price may be lowered even further, leading to some final sales, before the product is discontinued. At that point, supply basically dies off, though the downward-sloping demand curve seems to have a very high tail on the left side because there are some collectors who are willing to pay through the nose for a product (and are also subject to almost the full force of the supplier's monopoly power because they are collectors focused on a specific product, i.e. no substitutability, or very low elasticity in other words). Though this is more a result of the demand curve changing over time.
But now with these sales, the games are basically price-down early on, which leads to a much earlier capturing of that extra demand. They still do tiered pricing sometimes; AAA games usually don't get priced down -75% until several years after their release. Also, capturing extra demand gives the product more visibility, which is something that can only go up, not down. (Though this may occasionally be a bad thing, for poorly-received products.)
Pay-what-you-want bundles seem to be trying to cash in on the whole consumer surplus (is that the right term?), though I think people have found that it's effectively just a lowering of the price. They are usually bundled into several games a set, and generally, buyers are not interested in more than two or three of the games, but there is at least some perception of additional value, which may mean that revenues might be comparable to a typical discounted-price sale, depending on how well the bundle does. Pay-what-you-want bundles also usually exhibit time-tiered pricing though; games typically don't appear in a bundle until a while after its initial release -- which makes sense because it allows the producer to capture more revenue early on.
FWIW the supply curve for a digital release is probably really flat, because the marginal cost of producing an extra unit is really, really low. (Might it even be sloping downward?)
Also, the demand and supply curves of AAA games and obscure indie games are probably very different. Though with some common features.
Can any econ people tell me how much of this sounds right, and correct me appropriately?
Comments
It's been a while since I took an econ course but everything seems right. Steam Sales and pay what you want bundles are caching in on consumer surplus. The supply curve on digitally distributed goods is something that I would have to think about and do some work on mostly because the marginal cost of creating another copy of a digital good is incredibly low and most of the cost is in creating the original version. The value steam adds is mostly convince in things like installing games, managing games and transferring installed games to a new computer.
I wonder how much money goes into the very transaction of a Steam game.