Information goods are an important component of the modern economy. The definition of “information good” may vary, but it generally refers to goods that can be shared digitally (even if they haven’t been) and aren’t depleted when consumed.

In other words, information goods are non-rivalrous, i.e. one person consuming it does not affect another person’s ability to consume it, too. Further, as they can be freely shared, they’re considered non-excludable in “normal” circumstances, which means they can be accessed and consumed by people who have not paid for them. As such they can be considered a subset of public goods (since they’re both non-rival and non-excludable).

Markets usually fail to produce the socially optimal level of public goods, since the incentives to produce them are very low compared to their benefits. This is one of the reasons why information goods are often patentable, subject to copyright, or considered intellectual property, which typically make them temporarily excludable for commercial use. These innovations in economic law allow markets to produce a healthy level of these goods – more on this later.

For example, a book can be considered an information good. It contains knowledge, or simply a good story, that can be copyrighted and digitized for distribution, and it’s not depleted when consumers enjoy it. In the same way, movies, music, and video games can also be considered information goods. 

Many of these goods can take physical forms, too; books, CDs, and DVDs can be held, for example. But that doesn’t prevent them from being considered information goods, because what differentiates one book from another is the text printed into it. And, since that text can be digitized and distributed, it is an information good. There are many other examples: online courses, databases, software programs, algorithms like specific AI models, and even your private consumer data are all information goods.

Information goods often have high fixed costs to develop, because someone must discover or invent the information that’s worth selling. Consider a pop song, for example. It takes years of training and many hours of hard work to write a high quality, record-breaking pop song. However, after development is complete, the variable cost to produce and distribute the song is almost zero (at least in modern times) – once recorded, it’s very easy and cheap to spread the music.

These characteristics of information goods pose problems for the creators of the goods; recall that in a perfectly competitive market equilibrium, goods are sold where the price equals the marginal cost. But if that’s true, a seller of an information good might reasonably expect to make zero profit! How then can innovators be motivated to develop their products at all?

Protections for information goods abound in modern society

Because competitive markets usually have trouble reaching the socially optimal level of production for public goods like information goods, societies have constructed laws to allow innovators to make profit from them.

These laws include copyright and intellectual property rights laws, among others. For simplification, let’s refer to all of these laws as simply a ‘protection’ for now. Governments may approve a protection immediately when a work is created, after a work or invention has been successfully proven to be unique and worthy of protection, or in other ways.

These protections typically allow information goods to be legally excludable for a limited time (granting limited-time monopolies), thereby encouraging innovation.

This solves many of the problems we’d normally expect from a market selling information goods, though it does create new problems. Monopolies are notoriously inefficient arrangements for markets, as they lower output to maximize profit. They also introduce the potential for price discrimination.

The exact protections vary by the specific law and the country the information good is being traded in, but nevertheless offer similar benefits: the creator of the good is given the exclusive right to profit from their invention for a period of time. They may also allow others to profit from their work, for example by issuing licenses or collecting royalties, but they usually control the process of granting approval and dictate the terms of use.

Despite the drawbacks of monopoly, these systems of protection are good for the economy, as they provide incentives for these public goods to be developed in the first place. Without them, innovation would be severely limited. Any company could steal proprietary code for a new software product, any pharmaceutical company could immediately and cheaply copy another’s discovery, etc. The high cost of development for low-to-zero payoff would incentivize individuals against developing these information-based innovations at all.

In summary, without protections innovators and creators would be unable to profit from their creations efficiently and would have a much reduced incentive to innovate, which would drastically slow the pace of economic growth. Thus, having these protections in place encourages innovation without fully preventing society from reaping the benefits of widely shared information goods.

Network effects and tipping points

Information goods are often made better when many people experience the goods. That’s because they often create positive externalities, which are also famously under-provided by competitive markets.

For instance, computer software products like Microsoft’s Windows operating system are often a better experience when more people use them (in other words, they have network effects). It’s easier to share files, troubleshoot, and develop applications when the majority of people are using the same system. Similarly, being a fan of a particular movie or TV series is more enjoyable for most people when their friends are also fans, and companies tend to produce more content for more popular series.

Because of these positive externalities and network effects, buyers may decide that certain information goods aren’t worth purchasing unless there is a sufficient user base already. And, information goods with a higher number of users may attract more potential buyers simply because there’s already many people using them.

In this way, the markets for information goods may feature a “tipping point” where all consumers suddenly want to be part of that ecosystem, and other products struggle to attract buyers. These tipping points can suddenly cause otherwise competitive markets to resemble monopolies or oligopolies – even without formal intervention. A classic example is the market for smartphones, which is dominated by Google’s Android (and also Apple’s iPhone in the United States).

Other aspects of markets trading information goods

But the markets for information goods pose other challenges for consumers. Some information goods can also be considered “experience goods”. This means that in order to know exactly what’s being sold, a potential customer must experience the information first – thereby eliminating their need to buy the good at all.

Normally, it’s easy to inspect the product being sold. Buyers of pears, for instance, can easily tell if they’re in good condition, if they’re ripe enough, and how large they are before buying. It’s easy to tell if a pear is worth the price, even if you can’t bite it until you buy it.

But experience goods don’t share this feature. For example, when looking to experience a movie or a novel, consumers won’t know the quality of the item at all until they buy it and have access to the full experience. This sounds highly problematic in theory, but in reality, markets have adapted quite well to this feature of information goods.

Readers can likely already think of several market innovations that help to mitigate these aspects of experience goods. Movies and TV series frequently release trailers; books sometimes offer free previews, or can be rented from libraries; and sellers of software products (like video game companies) often provide demos for interested buyers. These previews allow consumers to get a taste of the good, and decide to purchase or not. “Shareware” is a similar concept, where developers release an information good for free, and ask consumers who enjoyed it to donate and support them.

Further Reading

For a more formal introduction to information goods, look no further than Dr. Michael Hutter’s Information Goods chapter published in the Handbook for Cultural Economics, https://doi.org/10.4337/9781788975803.00038.