################################################ # # # ## ## ###### ####### ## ## ## ## ## # # ## ## ## ## ## ### ## ## ## ## # # ## ## ## ## #### ## ## ## ## # # ## ## ###### ###### ## ## ## ## ### # # ## ## ## ## ## #### ## ## ## # # ## ## ## ## ## ## ### ## ## ## # # ####### ###### ####### ## ## ## ## ## # # # ################################################ The following paper was originally published in the Proceedings of the First USENIX Workshop on Electronic Commerce New York, New York, July 1995 For more information about USENIX Association contact: 1. Phone: 510 528-8649 2. FAX: 510 548-5738 3. Email: office@usenix.org 4. WWW URL: http://www.usenix.org Can the Conventional Models Apply? The Microeconomics of The Information Revolution Bruce Don, RAND, , and Dave Frelinger, RAND Operating with incorrect assumptions concerning information firms and how they conduct commerce has significant public policy implications. One possible consequence is inappropriate anti-trust action (or inaction) by government regulators. Because the decision to enforce is essentially Boolean in nature and can have long-term impacts on the industry, it is important to base regulatory and other public policy decisions on appropriate models. This paper argues that there are importantly different microeconomic paradigms applicable to information-based commerce. These differences should be investigated in some depth to inform future policy decisions affecting information-based enterprises and economies based on their commerce. Such research may lead to significant improvements in our ability to make good public policy decisions on issues that will challenge us as our society adapts to the changes in commerce brought about by information technology. ________________________ Almost daily our society must confront issues that require us to apply analytic tools to information-based commerce in order to reach policy decisions that can have long-term effects on the industry and our economyÑfor example the question of information firms and the exercise of monopolistic power. It appears that there may be importantly different microeconomic paradigms applicable to information-based commerce. Since there are significant policy implications if we make decisions based on incorrect models or assumptions about information firms and their commerce, we should be uncomfortable in deciding whether we can rely on a free market approach, or if market failures call for a government role until we have done some research into how microeconomic theory applies to the information age. We currently understand the changing role of information in economics to such a shallow extent that we often cannot even agree on apt names for some of the mechanisms that we puzzle over. This level of understanding suggests that taking a careful look at the Òmicroeconomics of the information revolutionÓ at an early stage in its unfolding history may lead to significant improvements in how well informed our public policy decisions are on key issues. To understand the need for this research in microeconomic theory we first need to understand how information technology is changing the role that information plays in our commerce, how important this may be in our economy in the future, and how this shift to information-based commerce poses a challenge to regulatory and other policy decisions because our analysis tools are limited. We start with how information technology is changing the ground rules. Change in Information Technology and Its Impact on Regulatory Policy From the standpoint of a policy-maker or policy analyst, the development and adoption of the underlying tools and processes that facilitate an information-based economy is occurring much faster then the regulatory process is equipped to handle. Multiple protocols are being deployed, tested, adopted, and in turn discarded at a pace that is staggering. Indeed when one considers just the recent exponential growth of the use of the World Wide Web and the Internet, it is almost impossible for governments to deal effectively with the issues surrounding such a rapid adoption of a set of tools, or of the variety of uses of those tools. If this were not challenging enough, the problem is further amplified by the fact that the micro-economic and policy-analytic tools, models, and theory we rely on in determining when market failures call for government intervention may be ill suited to analyzing commerce in the information age. TheÊpace of change is not the only problemÑthe changing role of information in commerce is more fundamental. The Role of Information in Post-Revolution Commerce Information plays a number of roles in economic endeavors. These have long evoked a broad literature in microeconomics dealing with such aspects as price (as a form of information summarizing demand and supply) and investment in research (buying new information).1 However, the thrust of this past thinking has shed only scattered light on what may be the more important aspects of the future role of information in economics, because it has yet to agree on a paradigm that regards information as product, or one that explains how information may be used as a production inputÑroles which information increasingly plays, perhaps even dominantly plays, in our commerce. The information revolution has seen an explosion in the number and types of enterprises engaging in such information-based commerce. Commerce based on informational goods such as data, text, software or interactive games, digitally recorded music, and video productions is notable because for firms producing these goods, the marginal cost of producing a copy for the nth customer is essentially zero. Not only does this imply that entertainment and software companies might find business profitable (if they can protect their property rights), but it may also imply that the traditional microeconomic tools we rely on for most analysis must be applied with great care when assessing information-based commerce. Additionally, if a substantial proportion of the firms in our economy deal in such information-based goods with near- zero marginal cost of production (they experience sizable increasing returns to scale over the relevant range), then general equilibrium becomes a less useful model of how such an economy would behave. Because these Òincreasing returns to scaleÓ conditions more accurately describe complex adaptive systems than equilibrium systems, we might expect to see things like rapid, almost explosive growth of small companies, lock- in of the firms (and their technology) that first reached a critical size, and extinction (in contrast to adaptation) after they have outlived their eraÑ particularly in the industries that deal with information-based goods. Additionally, firms that enjoy a near-zero marginal cost of production for their primary products (or near-zero cost of replication for their primary production processes) may have the potential for substantial monopolistic rents. Modern arguments that this is the engine that drives innovation and economic growth have put the role of information-based production and commerce in a new light as to their importance to the long-term growth of our economy. When considering the U.S. economy as a whole, the portion of the economy that is based to a large extent on informational goods is growing rapidly. Some sectors, such as the financial services industry, are already deeply involved in information-based commerce. In others, such as the entertainment industry, a transformation to information-based commerce is taking place. WeÊare even witnessing the emergence of previously unknown forms of information-based commerce, as typified by the bio-infomatics industry. The aggregate contribution of these industries to the economy are increasing relative to man-power and capital intensive firms. Unfortunately, it is very difficult to reliably predict the ultimate growth during a time when entirely new industries are coming into being to satisfy demands for informational goods that have been heretofore non-existent. Why Information-based Commerce Poses a Regulatory Challenge A problem for governments, industry, and consumers is that many of the approaches to conducting and regulating commerce in physical goods developed over the centuries do not necessarily reflect the rules of this new and emerging form of commerce. Indeed, many of the implicit and explicit assumptions of legal and regulatory policies are based on what must now be considered suspect assumptions. The consequence of this is that there is an additional set of uncertainties for business concerning possible regulatory action, such as inappropriate anti-trust or other regulatory action (or inaction), and that this may jeopardize the international competitiveness of an important element of the U.S. economy. A clearer picture of the problem is necessary to avoid some potentially serious problems that are likely to arise from piecemeal development of new Òrules of the road.Ó From the governmentÕs perspective doing nothing is not a viable option since the Òrules of the roadÓ for the existing economy are already codified and in place. The new information-based economy will have to be either consciously included or excluded from the already existing framework since it cannot be separated from the existing economy. If it is included, some adaptations will have to be made to avoid inappropriate applications of rules; if they are excluded, publicly acceptable rationales for exclusion will have to be made. In either case, understanding the nature of that new economy and the interaction of technology, social issues, and economics will be helpful to both the rule-makers and those affected by the rules. Central to these quandaries is the concept of information-as-economic-good in contrast to the canonical view of information as a characteristic of the market environment that influences decisions. For lack of agreed-upon terminology it is convenient to call these goods Òinformational goodsÓ (in distinction to Òphysical goodsÓ). An Illustrative Examination of Informational Goods Since we do not have agreed-upon definitions of these "new" goods, an illustrative model would be helpful to better define the importantly distinguishing characteristics of commerce in informational goods. This would give us a clearer picture of how pervasive such commerce is in our economy, and which firms might be subjected to policy decisions based on inappropriate analytic tools. Developing such a model also serves to illustrate what it might mean to investigate the Òmicroeconomics of the information revolution.Ó Figure 1 Ð A Model to Accommodate Informational Goods A Model to Accommodate Informational Goods Two importantly defining characteristics of economic goods are the property rights enjoyed by their producers and their consumption character. Because so much of our experience deals with physical economic goods, these characteristics are often thought of as being irrevocably bound together forming two categories: public goods and private goods. But once we contemplate trafficking in informational goods such a model appears too limited. To describe some of the fundamental differences between a model that can accommodate both physical goods and informational goods and more limited models, it is instructive to rely on an illustration similar to that developed by Ruggie [1972, p. 888] which is shown in Figure 1. In the figure, economic goods are classified according to the degree to which they possess two characteristics: rivalry and exclusivity. The first, rivalry, describes the process by which the good is consumed. This in turn says something about the process by which the good must be produced or supplied to the consumer. At one extreme of the spectrum which describes this characteristic, we say a good is rival in consumption. This means that oneÕs consumption of a measure of that good precludes the consumption of that same measure by another. Probably the simplest example of such a good is food; once you have eaten it others cannot. Other examples include television receivers, computer hardware and pre-recorded video tapes. To supply this good to consumers, a producer must create one measure (unit) for each customer. At the other extreme of this spectrum are goods which are non-rival in consumption. These goods have the opposite characteristicÑan individualÕs ÒconsumptionÓ of the good does not preclude the ÒconsumptionÓ of the same good by another individual. A broadcast television program might be a simple example of a good with this characteristic. To supply this good to consumers, a producer can create one measure of it, and service all customers who elect to enjoy it. The second characteristic, exclusivity, describes the property rights which characterize a good. This in turn provides insights as to how both judicial and physical laws have acted to determine what costs are necessary to protect these property rights by excluding other consumers. At one extreme are goods which have property rights which are said to be exclusive. By this we mean that it is possible (it costs little) to preclude consumption or enjoyment of the good by others. Music played on a cassette tape player provides a suitable example of this type of good. The person who owns the tape and player can exclude othersÕ enjoyment if he or she so choosesÑby using earphones. It should be noted that the ownerÕs enjoyment need not prevent others from enjoying (or dis-enjoying) the music; it is merely a matter of the owner exercising his or her property rights. Goods with such clearly defined property rights can be sold and may form the basis for a market. At the other extreme lie goods which have non-exclusive property rights. It is not possible (or very costly) to preclude others from consuming or enjoying such goods. A public beach or park are the classic examples. Because of the way we have defined property rights in such a situation, law- abiding citizens cannot be excluded. But Òfree wareÓ also falls in this categoryÑas does other freely copied software. Because consumers are not likely to buy goods which are available whether or not they pay for them, it may not be possible to sell these goods at a price which reflects their true value to the consumer or cost to the producer, so typically these goods must be supplied by benefactors or public agencies even in a free market economy. We often think of information as falling in this category (which it can if its property rights can not be protected), but this is largely the result of using a model in which property rights and consumption characteristics are bound together as they are in physical goods. Although we have examined the extremes of the characteristics illustrated in the figure, we have really described only twoÑpurely public and purely privateÑof the four types of goods this model allows. This is because our discussions have focused on the joint extremes, Òexclusive and rivalÓ and Ònon-exclusive and non-rival.Ó Although these joint extremes often occur together, there is no universal requirement that they do so. For example, goods with non-exclusive property rights which are rival in consumption are also possible. They are termed mixed private goods in the figure. These goods are somewhat more difficult to typify. However, laws define theft and ultimately property rights, so they can also mandate that consumers must share with others the goods they have purchased. Because these goods are rival in consumption a producer must create one measure for each customer. Such a Model Does a Better Job of Accommodating Much of Today's Commerce When considering how information fits in post-revolution economics, the most germane category is the lastÑgoods with exclusive property rights which are also non-rival in consumption (termed mixed public goods in the figure). A rock concert typifies such goods, or better yet, software packages or a program on pay television. Because these goods are non-rival in consumption a producer can produce (author or create) one measure of such a good and service with copies for all consumers who wish to enjoy it. Because they have exclusive property rights, these goods can be sold at a price which reflects the consumerÕs valuation of the good, but not necessarily the producer's cost of production. The physical goods that most of our microeconomic theory was created to address are rival in consumption and because of this, our convention in law is that they bestow exclusive property rights on both the producers and consumers that traffic in them. Informational goods on the other hand are non-rival in consumption and have a mixed profile of property rights. Those that the law protects as having exclusive property rights, such as motion pictures protected by copyright, form the basis for some of our most lucrative markets (e.g., the entertainment and software industries). What has changed is not so much the type or characteristics of economic goods, but simply the prevalence and importance of informational goods in our economy and therefore the need for a model that is more explicit about the characteristics that distinguish informational goods from physical goods. Table 1 Firms Producing Informational Goods May Not Always Be Part of the Ò Information IndustryÓ Firms That Deal in Informational Goods More specifically defining the characteristics of informational goods through the use of a model such as the one illustrated above leads to the conclusion that there are a number of types of firms that might be characterized as informational firms based on the nature of their products. Some of these (software firms) are what we might naturally think of as information firms, others (such as pharmaceutical manufacturers) do not so readily come to mind when contemplating information- based commerce, because they deal in more tangible products. Table 1 qualitatively illustrates the similarities and differences of these firms in terms of some of the characteristics discussed earlier in the paper. The software industry produces a wide variety of products for manipulating data and controlling devices. As already discussed, the actual physical products produced are very low in cost, while the value of the information is very high. Software firms are the archetypal information firm with normally low costs of entry for uncrowded sectors, but with increasing costs of entry as features are added to differentiate products, or as more functionality is desired. The movie and entertainment industry is comprised of firms providing content (programming and movies) for broadcast or other means of selling that content. These firms are able to exclude non-paying customers from viewing their products in non-broadcasting milieus, and to control to whom the initial release for broadcast is made. The marginal cost of delivering the product to the nth customer is very low for the entertainment industry, but the production costs can be large enough to necessitate large numbers of consumers supporting the product. While not normally thought of as informational firms, the growth of alternative mechanisms for distribution of their productÑdigital data available from a server rather then physical items such as films and video-tapesÑare beginning to force many of the same economic factors that dominate the software industry on to the movie and entertainment industry. The telecommunications industry is in the business of transporting information from producers to consumers. Many consider the telecommunications firms to be information firms because of this association with information. However, unlike firms discussed earlier, this industry requires a relatively large capital investment to enter the game, and in general behaves like other common carriers when they are not overloaded.11 The cost per additional individual user is nearly nil because of the large band-width available for communications relative to the small impact of an individual user. As band- width is required when the system is approaching saturation, it can be added in large increments, allowing for large numbers of additional users to be added. The mainstream pharmaceutical industry is not typically thought of as being made up of information firms since it produces tangible goods (drugs and devices). However, the major characteristic of these firms is that the drugs that are developed have a very high development cost and a generally low cost of production for individual doses. For many of these firms, the development of information on the compact of different drugs is the firmsÕ primary job. As yet the bio-infomatics industry is in its infancy. The large-scale sequencing and manipulation of the data comprising the genetic structure of organisms is just now beginning to support bio-engineering tasks. This industry is distinct from that of the pharmaceutical industries in that the primary products are the information on the sequenced DNA itself, and the tools for manipulating that information, rather than the physical products they yield. One complicating factor for this industry is the uncertainty of rights to the data itself. The United States is currently allowing the patenting of applications using manipulated DNA. In this model, the expression of the sequence is protected, but the basic data is still viewed as a discovery that does not deserve patent protection. However, others are arguing that the sequence, whether or not it has a known function is patentable. Similarly, the copywriting of data does not appear feasible, but the indexing of that data and ordering of it in a database may be copyrighted. Some companies are positioning themselves to control a large fraction of the data as well as the tools for manipulating the data so as to make it unattractive for other firms to sequence DNA rather then simply purchase it. Commerce Based on Information Goods The firms that deal in informational goods are typically viewed as highly profitable. Does this re-thinking of what they are producing (e.g., the informational content of the CD-ROM, not the physical storage device) suggest any insights as to why this is so? As already alluded to, digital and other technologies that allow information (music, video, programs, numerical data) to be easily reproduced move firms closer to working purely with information. This is in contrast to producing the physical manuscripts that were used to record and store information on in the past (e.g., books, video tapes, etc.) Making a copy of information held in digitized form neither detracts from the creatorÕs original stock because information is non-rival in consumption and takes little time or effort to produce the serving for the nth customer. The result is that the marginal cost of production is essentially zero. If the property rights to what is being produced are exclusive (to the producer), the firm has a market. If the marginal cost of production is very low, the firm has the classic characteristics of a natural monopoly because it exhibits increasing returns over a very large range (essentially all potential consumers in the market). This has several significant implications. First, there is substantial room for monopolistic rentsÑin fact one could argue that this is the incentive that drives the innovation and economic growth that seems so prevalent in information-based commerce today. Next, such advantages may accrue to broader segments of the economy than we commonly recognize, as the informational content of goods outweighs their physical content. In the micro-manufacturing and magnetic disk recording- head industries for example, the marginal cost of producing the physical goods is quite lowÑmost of the value of the product comes from the information embodied in the design of the product. Firms operating under these conditions may enjoy advantages similar to firms producing informational goods. Finally, we may be poorly characterizing an important factor of productionÑinformation. AÊlong-term, historic view could argue that at first the production function included only labor; then added land; then capital equipment; and finallyÑ and only recentlyÑinformation. Indicators of the importance of information in the production function are available. Private equipment investment in computers and other hardware-based information technology appears to have surpassed industrial machinery investment in the early 1980s. However, a direct measure of capital investment in information itself is much more difficult to make because of data and accounting limitations.12 Information-based capital investments such as desk-top publishing and film-editing programs have unique advantages over more traditional production equipment given their ability to be used over and over again in the production process without wearing out. If we do not include information in the production function, and it is actually an important input, we will attribute any productivity associated with information to the other factors of production. Our Models and Information-based Commerce With a potentially large number of the firms in our economy engaging in wide-spread information-based commerce, and a concern that this has important differences from the physical- goods commerce that current models have been tailored for, we should seek a clear understanding of just how well our current models work in this new venue. To this end we need a careful inventory of our microeconomic analysis tools to understand where they apply "as is," where they need to be modified, and where they are inappropriate or limited. A cursory look highlights some limitations that may result in important shortcomings: Despite the fact that we are willing to pay quite different prices for yesterday's and today's commodity trading data, or that seven megabytes of office software can command a price five times as much as a similar measure in game software, the current application of microeconomic theory often treats information as an undifferentiated good. (Vintage and quality of information matter to both consumers and producers.) ¥ We have problems with definitionsÑwe use some information as factors of production (e.g., input data-sets); other information as part of the production process itself (e.g., word processors); and still other information as final products (e.g.. motion pictures). However, these flavorsÓ of information are not commonly defined, or distinguished, so it is difficult to say that we fully understand what we can not as yet even name. (A sense of verb and noun is involved in the role information plays in economics as well as familiar economic characterizations, such as intermediate goods and capital goods, which are normally only attributed to physical goods.) ¥ Counting poses a problem. Books, software packages, and megabytes are all seemingly ready measures. When we packaged our information in familiar, often physical containers (video cassettes, books, broadcast TV packaged in time slots), we had a clear understanding of what we were measuring. Nor did our economy cause us to worry much about comparing the quantity of information sold in book form to that, for example, sold in software package form. But, as we move toward trafficking in information in purely digital form, a fundamental characteristic about information becomes more readily appreciatedÑsharing information is not like sharing physical goods. AÊsecond userÕs use and enjoyment of information ("consumption" in canonical terms) does not necessarily diminish the first user's ability to enjoy it. (Rivalry in consumption and property rights combine differently than in physical goods.) These are only a few examples, but they serve to warn us that our analysis tools can break downÑor may be extremely difficult to use properly. Since we use these tools as a way to structure our thinking about such problems as whether or not we are faced with a market failure and need government intervention or regulation, this has substantial implications for the policy choices we are increasingly challenged with as the "Information Revolution" unfolds. Implications for Policy Choices Based on Microeconomics What are the implications if there are many firms in an economy that produce informational goods and our current models of how information- based commerce works have problems? First, the classical theory of the firm may be largely inappropriate even for small firms which, rather than being "price-takers" in the market, have the potential to grow quickly from garage-based operations to lodge themselves in large-market- share positions. Because of this, other microeconomic models of the firm may provide better descriptions of what goes on than price- taking behavior does, and our antitrust approach to firms that exhibit "monopolistic behavior" may need to be re-thought, especially in economies which seem to be driven by technological growth. Next, since we currently do not specifically include information in the production function, we may not adequately understand technology-driven economic growth, particularly if many of the firms in our economy use information as a factor of production in either a consumable (time perishable input data set) or a capital investment (a long- lasting software package for product design) sense. As a result, tax incentives may emphasize the wrong kind of investmentsÑphysical capital in contrast to informational capital. Finally, if both factor markets and product markets are characterized by large segments which enjoy increasing returns to scale (because they deal in informational goods) then conventional general equilibrium becomes harder to apply, and the economy that results is best described as a complex adaptive system. If the economy displays substantial increasing returns to scale, we should expect to see things like rapid, almost explosive growth, lock-in of firms and their technology, and extinction (in contrast to adaptation) as more commonplace in our economy than heretofore. IfÊour model of a firm's life cycle bespeaks many firms experiencing rapid growth to substantial market share and rapid extinction because of the market forces they face, our approach to government rescue efforts, like that for Chrysler, and the timing of antitrust actions, like the 1980s investigations of IBM, will need to be viewed in a different light. A Need For Investigation It appears that there may be importantly different microeconomic paradigms applicable to information-based commerce. While many of these have been reflected in case study analysis of industries not generally regarded as engaging in information-based commerce (for example the pharmaceuticals or video rental industries), they have not been applied as broadly as needed. Since there are significant policy implications of making decisions based on incorrect models or assumptions concerning information firms, forging an understanding of the Òmicroeconomics of the information revolutionÓ at an early stage in this unfolding history may lead to significant improvements in how well informed our public policy decisions are on key issues. We are already confronted by such issuesÑ for example the question of information firms and the exercise of monopolistic powerÑon almost a daily basis. Further, a determination whether or not such a Òmarket failureÓ is, in fact, a problem that requires government intervention or regulation is indelibly colored by how we (as a society) think about the issueÑthe problem structure, theory, and models we apply. Because poor policy choices can have long-term effects on the industry and our economy, it is important to develop some clearly thought-out foundation upon which to base regulatory and other public policy decisions. Recognizing that we currently understand the changing role of information in economics to such a shallow extent that we do not even have apt names for some of the mechanisms we puzzle over, it would be prudent to be skeptical that any current assessments are based on a sufficient understanding of information-based economic interaction. Balancing the implications of such a simple view are a host of factors that still need to be accommodated. It may be that the operation of the "unseen hand" is not that different after allÑor that market forces, imperfect as they are in this new venue, may still do better than regulatory policy in keeping up with change in information-based commerce. For example, it may be that since consumers have little use for information that they already know, informational goods are so differentiated (each package of information being regarded differently by each consumer) that producers do not enjoy increasing returns to scale to any great extent. In yet a different vein, evolving software technology, such as search engines or abstracting software may largely displace whole segments of high value-added commerce (such as indexing and abstracting services) with appropriate gains in productivity for those that use them (by lowering the transaction costs for acquiring the right intermediate informational goods). It may even be that such technologies allow market interactions that are not practical today, for example, we are already experimenting with pay-per-use paradigms in contrast to the pay-per-copy framework we usually use for informational goods today. In short, we should be uncomfortable in deciding whether or not we can rely on a free market approach, or if market failures call for a government role, until we have done some research into how microeconomic theory applies to this new age. References Arthur, W. Brian, ÒPositive Feedbacks in the Economy,Ó Scientific American, pp. 92Ð99, February 1990. Priest, W. Curtiss, An Information Framework for the Planning and Design of Information Highways, Center for Information, Technology and Society, February 1985, with revisions September 1985 and OctoberÊ1994. Romer, Paul, "The Origins of Endogenous Growth", Journal of Economic Perspectives, 8(1), pp. 3-22, Winter 1994. Ruggie, J.G., ÒCollective Goods and Future International Collaboration,Ó American Political Science Review, 66(3), pp. 874Ð893, SeptemberÊ1972. Schumpeter, Joseph, Capitalism, Socialism, and Democracy, New York, Harper & Row, 1947. 1For an excellent overview and synthesis of this literature see Priest, 1985 and 1994. 2Arthur (1990) has provided what are perhaps the deepest insights about the characteristics of such an economy using computational experiments. 3This perspective has a long history in economic thought dating back to Schumpeter (1947). Recent insights as to the role that the near-zero replication costs of knowledge- and information- based products and processes may play in our economy have perhaps been most fully developed by Romer (1994). 4Of course, informational goods are not really new at all, but their prevalence and importance in our commerce, particularly in digital or electronic form, is both new and growing. 5History has shaped the economistÕs term ÒconsumptionÓ in the context of physical goods, and it lacks specificity when we attempt to distinguish between that consumption attributed to a rival good, in which consumption by one precludes consumption by another, and the consumption of a non-rival good, in which consumption by one does not affect the amount of the good available to others. We have used the term ÒenjoyÓ when referring to consumers extracting the utility from the latter. 6Over the relevant range of customers, for in real life crowding and transportation costs often limit ÒallÓ to a finite number. 7While our discussion here focuses on property rights, we should note that, in the real world, other aspects intervene to complicate the matter. For example, while there may be no legal barrier to oneÕs access to a beach, the distance one must travel to enjoy it can significantly limit access. Our beach or park are only good examples provided the cost and effort of getting there is roughly the same for all the users we are considering. 8The case of copied software illustrates the need for more fully thought-out models. If the software is copied by someone who would not have purchased it, the producer has not actually suffered a loss (as the act of copying did not diminish his stock of information or preclude a sale). In fact, the situation may prove beneficial to the producer if the copy serves as a convincing advertisement for the next version of the software. If the copied product is sold, the producer may still not suffer a loss if the pirated product is sold to a consumer who would not have paid the legal price. Usually the property rights issue does not come into play when dealing with goods which are rival in consumptionÑanotherÕs enjoyment of the good you paid for smacks of theft. But initial proposals for a deep sea bed mining policy such as that incorporated in the pre-1980 drafts of the Law of the Sea Treaty would have created such a good. The technology to commercially exploit the large quantities of potato-sized nodules composed of manganese, copper, cobalt and nickel had been developed by a few industrialized countries. The proposed policy would have required those countries exploiting the nodules to share their harvest with less developed nations incapable of exploiting those resources. The decision to pursue creation of such a good was an acknowledgment of the ambiguity of international law in regards to the sea bed, the difficulty and inconvenience in enforcing property rights in that environment, and of the relatively marginal value of those goods. Interestingly enough, a similar arrangement has also been proposed for lunar mineral rights, as well as by some for benefits arising from genetic sequences and products extracted from organisms indigenous to Third World nations. But often only once to each consumer. In contrast to rock concerts or musical recordings, many information goods satiate the consumer with only one measureÑonce it is added to their stock of knowledge consumers have little desire to acquire it again, unless the information becomes old or is forgotten. There is a difference between wireless communications modes and terrestrial fiber-based modes of transmissions. For wireless systems, for example cellular phones, the issue is the availability of band-width within a limited portion of the frequency. Physics limits the amount of communications that can be forced into a given portion of the radio-frequency spectrum, and aside from utilization improvements operators have to live with the limitations of nature. For terrestrial fiber based systems, additional fiber bundles can be easily added along existing rights-of-way allowing for increases in capacity. 12For example, in some firms software expenses under some threshold (e.g. $1000) are not considered capital expenditures even though the aggregate expenditures on these software packages may be significant and the re-capitalized (upgraded) software has a useful life longer than the hardware it runs on. 13This has the potential to overcome a basic paradox that causes difficulties in markets for informational goods. Purchasers do not know if the information that they wish to buy is useful to them until they buy it. With pay-per-use they may pay a small premium to see if it is useful, but what they pay would be largely determined by how useful they find the information.