Competition and “Competition”

My friend Alex Singleton points me to this essay on the “free lunch economy.” Madsen Pirie uses the clever example of matches to illustrate the trend of more and more things being made available to consumers at zero cost:

When George Orwell was Down and Out in Paris and London, he observed that homeless people, then called “tramps,” would pick cigarettes from the gutter and sometimes roll their own from the residual tobacco (there were few filter tips in his day). The problem was matches; these were a valuable commodity among the destitute community, for few would spend the few coppers a box cost, even if they had the money. Now, of course, free matches are widely available, and not as many people buy them. They use free boxes which carry advertising, or they use cheap disposable lighters at a tiny fraction of what a lighter used to cost.

This is obviously a genuine trend, especially online. We’ve come to expect search engines, web browsers, blogs, phone calls, and many other digital products to be available to us for free. The marginal cost of such products has become so low that many firms have found that they can sustain their business models with just a trickle of advertising.

Some people have also come to expect music and movies for free:

Record companies made money by selling at several pounds each pieces of plastic which cost pennies to produce. The value lay in the intellectual property. The physical object that changed hands in the form of a vinyl disc, a tape, or a CD, was the way value was exchanged. The rise of the personal tape recorder caused some concern, because teenagers didn’t regard it as stealing to copy a friend’s music. Record companies began insisting that DJs talk over the opening of the records they played so that listeners could not record a “clean” copy.

The rise of the internet and of file sharing caused a major change in the dynamics of that market. Purchasers, many of them young people anxious to stretch their pounds, found they could share files with each other, and that advancing technology gave them top-quality copies. Music sales went into decline, and there were fears for the industry itself. The solution has been paid-for downloads such as those bought through Apple’s iTunes. Purchasers have been found to be ready to pay a small sum to download legally, with increased numbers of them making up the lower price they pay. The music industry is breathing more easily, but no one doubts that it was the free product which forced the change.

Unfortunately, the author doesn’t seem to notice that this is a fundamentally different phenomenon. Google gives its search engine for free on purpose, and they have a business model that allows them to profit from doing so. One reason they do so is because other search engines are also offering their own product for free. Market competition keeps the price at zero.

The music example is quite different. In that case, what’s driving the price down isn’t competitors offering their products at a lower price, but consumers simply taking the products without paying. Whatever the ethics of the situation (I tend to think taking music you haven’t paid for is wrong) what’s clear is that the economic dynamics of this situation are rather different. The reduced price doesn’t necessarily reflect reduced costs on the part of the music industry, and so there’s no reason to think that the resulting revenues will be sufficient to support continued music creation. We might end up in a situation where there are so many free-riders that the music industry is forced to dramatically cut back its activities.

I happen to think that in the long run, the market price for most music will be zero. That’s because music is rapidly getting less expensive to produce, and there are probably thousands of people who would gladly produce music gratis if only they could get a substantial audience, just as there are millions of bloggers who give away their blog posts for free. But that doesn’t mean that musicians shouldn’t be free to charge for their music if they want to. And I don’t think the increasing tendency of people to take music without paying for it is anything to celebrate. It’s certainly not “market competition” as we ordinarily understand the term.

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