Recognizing That Just About Any Product Is A Bundle Of Scarce And Non-Scarce Goods

from the fairly-important dept

After skipping a week, I wanted to get back on track (and hopefully get closer to finally wrapping up) the series of posts I've been writing about economics of non-scarce goods. In going through some of the debates and arguments over the past posts, I think one of the key things that people have trouble grasping is the fact that there are different components to anything that's being sold -- and that any product is really a bundle of a variety of things, which quite often have both scarce and non-scarce components.

So, if you're buying a book, you're buying the paper and the binding, as well as the words printed inside. However, you're also buying the satisfaction or utility that you get from reading (or perhaps just owning the book). Or you may be buying the benefit of being seen with the book or being able to talk with others intelligently about having read the book. Or it may be an investment, where you are buying the ability to resell the book. This applies to just about any product. If you're buying a couch, you're not just buying the wood, stuffing and fabric, but the benefit of having the couch and being able to sit on it. You're buying the belief that it will look good in your home and match with the rest of your living room. If you buy a car, you're buying the materials that make up that car, but also the transportation and freedom it provides you vs. the alternatives. If you're buying medicine, it's not just the pills that you're buying, but the relief that they provide. Most people recognize this intuitively, but sometimes in these discussions people forget that, and focus in narrowly on the core product itself that people think they're buying (or sellers think they're selling).

What's noteworthy is that bundle may be different for different people. Some people buy houses solely as investment properties, while others intend to live there. The point, however, is that every product is a bundle of different components -- and you can usually break those components down into scarce and non-scarce categories. In thinking about how to market any product, sellers are intuitively calculating the value of that bundle of things, even if they focus on just selling you one aspect of the bundle. Each of the different components (both the tangible and the intangible) are part of the "resources" or "inputs" that make up the product that's being sold.

Of course, with any product, the producer of that product wants to reduce the costs of what they're selling, while increasing the value to buyers. One of the easiest ways to do this is to pump up the non-scarce parts of what's being sold -- because that's a very cheap way to increase value. Even if it had a large fixed cost upfront, once it's created, it costs nothing additional (no marginal cost) to make use of that non-scarce good to help promote the bundled scarce goods and make them worth a lot more. So BMW makes good cars (a scarce resource), but the value is even higher due to BMW's brand (a non-scarce resource). Last week we noted that movie theater boss Marcus Loew understood this years ago when he said: "We sell tickets to theaters, not movies." He recognized that they were using a non-scarce resource (the movie itself) to make it possible to sell the scarce resource (seats in the theater). As you look around, you'll begin to notice that you can find these types of things in almost any good. A candy store owner uses the non-scarce resource (enjoyment) to make the scarce resource (the candy) worth more. As long as you can bundle non-scarce resources to make scarce resources more valuable, there are ways to make money. The trouble comes about when you try to start selling strictly non-scarce resources by themselves... but we'll save that discussion for later.

If you're looking to catch up on the posts in the series, I've listed them out below:



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  1.  
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    Michael Long, Mar 15th, 2007 @ 4:19pm

    Non-scarce

    "The trouble comes about when you try to start selling strictly non-scarce resources by themselves..."

    Good thing that one is saved for later, because in reality there are no such things as strictly non-scarce goods in this regard. A digitally-distributed movie may be considered by some to be "non-scarce", but if it took two years, $40 million dollars, and 200 highly talented people to create it then it's definitely "scarce".

    Time is scarce, money is scarce, and talented people are perhaps scarcest of all. But somehow the end-result is supposed to be different?

    Even in the physical world, distribution costs are but a fraction of the whole. Serenity cost $40 million dollars. An extra million or two can buy an entire boatload of DVDs for resale, and that's still only a fraction of what it took to make the thing in the first place.

    Again, it all comes down to the assumpltion that models need to change, and I still ask why? Investors finance movies and studios make them all on spec. We get to examine the results, and, if we think we'll like 'em, get to own them for what amounts to a miniscule micropayment of the original costs.

    If enough people like it, they make money. If they don't, they don't.

    And this is bad, how?

     

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  2.  
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    Mike (profile), Mar 15th, 2007 @ 4:33pm

    Re: Non-scarce

    A digitally-distributed movie may be considered by some to be "non-scarce", but if it took two years, $40 million dollars, and 200 highly talented people to create it then it's definitely "scarce".


    It's scarce before it was created. It's non-scarce afterwards.

    Time is scarce, money is scarce, and talented people are perhaps scarcest of all. But somehow the end-result is supposed to be different?

    No, that's exactly the point. You bundle non-scarce goods with scarce goods -- and you just named some very important scarce goods. So you're getting exactly to the point.

    Again, it all comes down to the assumpltion that models need to change, and I still ask why?

    Because if the people with the existing models don't change, new entrants will figure out how to embrace these new models and the old models won't hold any more.

    And this is bad, how?

    It's not bad, it's just unsustainable.

     

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  3.  
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    Anonymous Coward, Mar 15th, 2007 @ 9:11pm

    I've been thinking along the same lines as you point out here. I think with manafacturing where it is today that even physical products are non-scarse. The only thing that is stopping them from producing more or less of a product isnt the resources that go into making it but projections based on sales. So technically based on your argument they are artifcally controlling a non scarse resource and making it scarse. Not to add value to the product but to control its price.

     

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  4.  
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    Paul, Mar 16th, 2007 @ 4:28am

    Re: Non-scarce

    All those things you mentioned where one fixed-cost in the very beginning. Therefore, as they sell movie tickets and dvds, that cost almost becomes negligible to the final buyer. Therefore, if they're purchasing a download of the movie, they're really only buying the non-scarce portion. The rest had already been paid for.

     

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  5.  
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    Michael Long, Mar 16th, 2007 @ 7:11am

    Re: Re: Non-scarce

    "It's scarce before it was created. It's non-scarce afterwards."

    It's the same product.

    "Because if the people with the existing models don't change, new entrants will figure out how to embrace these new models and the old models won't hold any more."

    That's fine by me, but I want those new models to exist, and to prove that they're profitable and repeatable and scalable, before we advocate tearing down the existing structure.

    Otherwise you're in the position of setting fire to your boat, because you've told that another one is one the way, and "should" be there in time to take you safely away.

     

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  6.  
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    Paulie, Mar 16th, 2007 @ 7:51am

    Scarcity

    The enjoyment of candy doesn't exist without the candy. You can't separate them and call one scarce and one not. The enjoyment of an alternative is just not quite the same if that's what you mean.

    Nit picking perhaps, because you seem correct everywhere else. Don't however forget that an artificial scarcity, if it can be created, is just as effective as a physical one, so zero marginal cost will just be a huge incentive. The cost of "producing" the good will be the cost of maintaining the artificial scarcity, ie DRM, kickbacks, lawyers.

     

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  7.  
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    Mike (profile), Mar 16th, 2007 @ 9:53am

    Re: Re: Re: Non-scarce

    It's the same product.

    But it makes all the difference in the world whether the costs are sunk or not. The incentives in terms of what to do matter if the product doesn't exist or if it does.


    Otherwise you're in the position of setting fire to your boat, because you've told that another one is one the way, and "should" be there in time to take you safely away.


    No. What's happened is that someone has already set your boat on fire, and the other one is already sailing away...

     

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  8.  
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    Mike (profile), Mar 16th, 2007 @ 9:57am

    Re: Scarcity

    The enjoyment of candy doesn't exist without the candy. You can't separate them and call one scarce and one not. The enjoyment of an alternative is just not quite the same if that's what you mean.

    This is true to some extent... though you can separate out the anticipation of the enjoyment or the desire for enjoyment. But, what you're noticing is that the closer you can bundle the scarce and non-scarce goods, the better.

    Don't however forget that an artificial scarcity, if it can be created, is just as effective as a physical one, so zero marginal cost will just be a huge incentive. The cost of "producing" the good will be the cost of maintaining the artificial scarcity, ie DRM, kickbacks, lawyers.

    Well, I disagree that artificial scarcity is just as effective, because the artificial barrier is usually pretty weak.

    But, more importantly, where the danger comes in is that if your business model is focused on the artificial scarcity, then it's just opening up a HUGE opportunity for someone else to do a complete end-run around your existing business model. That's what we're seeing today in so many industries. While you can create artificial scarcity for some amount of time, it's not a sustainable business because someone else will decimate your business model.

     

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  9.  
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    Anonymous Coward, Mar 16th, 2007 @ 9:28pm

    So, which pieces of the bundle are contravariant?

     

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  10.  
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    Anonymous Coward, Mar 17th, 2007 @ 2:36pm

    Since part of the value of a luxury brand is its exclusivity, it seems incorrect to describe BMW's brand as non-scarce. If BMW's were ubiquitous, the value of the brand would probably fall significantly.

     

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  11.  
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    Mike (profile), Mar 18th, 2007 @ 2:12pm

    Re:

    Since part of the value of a luxury brand is its exclusivity, it seems incorrect to describe BMW's brand as non-scarce. If BMW's were ubiquitous, the value of the brand would probably fall significantly.

    No, the cars are exclusive (they're scarce), but the brand is non-scarce -- it's everywhere. And the further the brand spreads, the more valuable the cars are...

     

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  12.  
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    Dewy, Mar 18th, 2007 @ 7:10pm

    true, perfectly true

    Since part of the value of a luxury brand is its exclusivity, it seems incorrect to describe BMW's brand as non-scarce. If BMW's were ubiquitous, the value of the brand would probably fall significantly.
    ................................................................................

    Perhaps a better example of what Mike is trying to point out would be Harley Davidson. They have long since Set aside the Bike as their primary product... they now sell products with their licensed image... including bikes. They are applying a "Standard" that is associated with the "non scarce" good... the well known trademark... with many scarce goods.

    The movie that was mentioned in the first post has upfront costs that are artificially created by the current model and industry... those are what will change. No reason for Tom Cruise to make $30 million a movie... no need for production assistants having an assistant and a hairdresser, and a trailer on the set.

    Someone will come along and produce a movie that shatters expectations and cuts production costs thus proving a sow's ear is not a silk purse.

    We've faced this dozens of time in recorded history... button makers, printing presses, recording technology, wireless transmission... nothing new here. The industry must adapt... or wither and die as new tech replaces old.

    And a side note... they are attempting to criminalize a pursuit of happiness... the pursuit of art, enlightnement and creativity. No one is "Stealing" anything. No "product" is being denied to any other person. Filesharing and CD-R's are highly inferior to "owning" a legit copy of a CD for archival purpose and that is where they need to direct their efforts. Not persecuting Tab sites and College kids swapping dance remixes.

     

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