How does a market of free goods work?

Cory Doctorow in his review of Free, Chris Anderson’s latest book:

Information that can be freely reproduced at no marginal cost may not want, need or benefit from markets as a way of organising them.

Considering that markets organise themselves by exchanging information about costs and goods/services, and that there is a price attached in the sense of so-called transactional costs, that is not such a bad idea. Transactional costs are the price (usually in time and energy, not actual money) you pay for gathering information about the market and the product, and for making the actual purchase.

Often, these costs are a negligible part of the purchase price, but with free information they tower largely over it.

Cory Doctorow then goes on (and off the rails as far as I am concerned) suggesting that the distribution of free products may take place along the lines of ‘socialist’ organisations such as families and offices. Let us not go there, it is where madness lies.

The question is an interesting one and takes place at a micro-level—and indeed Doctorow has written much more wisely about the topic. How does a consumer decide which free information product to select? As with all products in a free market, a consumer needs information about the product. But gathering that information has a cost!

The micropayments movement has been racking its brains over how to lower this cost, as transactional costs are what has kept micropayments still-born so far. If you are unfamiliar with micropayments: very small payments for products of little (but not: no) value, such as comics you read on the web. The worth of an individual strip may be a few cents, maybe even less than a cent. It turns out that consumers who are in principal willing to pay half a cent for such a comic, aren’t willing to spend the time of paying half a cent. In other words, they value their time higher than the price of the product.

Models that seem to be getting money to producers of both cheap and free information are subscriptions, patronage, jar tips and so on, and the reason they work is that they either reduce the cost of figuring out how to pay to almost nil, or they increase the value of what is being bought.

There might even be some kind of sweet spot where the actual cost of (many instances of) the product is equal to the perceived monetary value of the transactional costs. If the producer would set the price at that sweet spot, you would get the interesting situation that the buyer would basically be handing over money so that he (or she) won’t have to bother with figuring out the payment details for a while—he will essentially get the product thrown in the bargain for free—, whereas the producer will see the money coming in as a payment for the product. You could get interesting misunderstandings that way, for instance if that producer lowered his price he might see his market collapse without ever understanding what just happened. (Just speculating there.)

That leaves the question of what happens when the producers do not want any money.

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