Economics of Information
Production
January 20, 2011
Gueorgui 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.