Many information markets are vibrant, such as the market for music (e.g. Spotify) and the market for content streaming (e.g. Netflix). Bustling online activity coupled with the easy availability of vast amounts of free information diverts attention from problems in both markets and information niches that have yet to find a sustainable business model. This explainer provides background information on information markets, why they fail, and suggests ways to repair them.
Introduction: What is information and who produces it?
Broadly defined, information is anything that is created digitally or that can be digitized. This includes all forms of content: texts, images, sounds, videos, code and data. Information has attributes that make it an unusual as either product or service. Being mostly intangible, it is easy to copy and transfer, and multiple copies make it highly durable. Unlike many other market items that consumers seek, information is produced by anyone and everyone: This includes governments, corporations, independent professionals, artists, scientists and lay people of any age or literacy level. The variety of manufacturers of information can be categorized into three broad categories according to funding and motivation:
- Information created by public bodies and funded by tax money;
- Information created privately by for-profit organizations;
- General communicative activity by anyone
Where is the money?
The main opportunity for exchange of information via a market mechanism lies with the second category, information created privately by for-profit organizations. This is where markets are expected to function but often fail. One reason for this failure is the unusual co-existence of the three groups of information markets (public, private and interpersonal). By having a common point of access such as the worldwide web and search engines, information from all sources is presented equally without alerting the users about source characteristics and the various options available for filling their information needs.
Another issue slowing the development of information markets is techno-economic. While information storage and sharing technologies have developed rapidly, pushing forward free availability of information, monetization mechanisms have lagged behind. The limitless number and kinds of public and interpersonal information producers implies that we have abundant supply combined with a deficiency of methods of monetization. This situation can be perceived as a feedback loop: Because monetization is weak, information is given away for free and becomes abundant. Markets function in scarcity, not in abundance.
This abundance of information is both a blessing and a problem. We may perceive more information positively, as it implies further fulfillment of user needs and greater transparency. Yet abundant information is also a source of negative phenomena such as a sense of information overload, and the proliferation of negative sources of information such as psychological warfare and fake news. Possibly, market mechanisms would provide partial relief for such problems.
The monopolization of information markets
Turning to the structure of information markets, we soon realize that information goods are unique in many ways and differ from regular market goods. For example, information as a product is constantly changing and being updated. Today’s news is different from yesterday’s news; each published book is distinct from previous books; every app is different and may even be personalized or customized. Taking the uniqueness of information together with additional traits of information, we discover that information markets have a unique combination of characteristics:
- Intangibility – the digital nature of the products;
- Infinite variety;
- Physical channels – the intangible information products exist and flow within technological devices: computers, mobile phones and networks;
- Copying and sharing is the norm – these are the affordances of the digital products;
- Concurrent fee-based and free offerings, direct and indirect payment;
- The experiential nature of the value of information – value is revealed through reading or use;
- The markets exist in scale-free networks.
This unique combination of characteristics is the bedrock of markets which host unprecedentedly huge global monopolies. Google is synonymous with search; Facebook is synonymous with social networks and the list of super-powers goes on in many fields of digital activity and business. In the early days of the Internet, monopolies formed quite naturally, based on innovation in a scale-free network environment. Nowadays, monopolies occur because this form of business has become the ‘holy grail’ for entrepreneurs and investors.
Interestingly, monopolies don’t have to be huge and global when it comes to information. They may also occur in niches. For example, in academic publishing each highly-ranked peer-reviewed journal can be viewed as a monopoly of the relevant scientific niche. Such journals generate an exceptionally high demand: Many researchers want to publish in them but only a small percentage succeeds. The subscription prices for these journals are extremely high for no apparent reason, yet they are not paid by the individuals generating the demand; rather they are paid by public bodies such as libraries. Research information, which is created as a public good, is thus privatized and monopolized. The natural inclination to monopolize information markets is very attractive to private companies. However, as the open access movement set out to change this situation, academic publishers are now offering open access and again securing their monopolies while collecting very high prices (author processing charges) from their captive authors.
Can the loop be opened?
To summarize, we observe that monopolies dominate the domain of information markets. They come in various sizes, and are often global because they exist in a digital network. One could say that if this is the natural way that information markets develop, so be it. The advice in this case would be to find new niches to create new monopolies which would benefit a handful of entrepreneurs. Would this arrangement assist in social wellbeing? Probably not. Monopolization of information results in vast income inequalities, high prices for fee-based information, ever-increasing advertising rates, privacy issues for free information, barriers to market entry (consider the problem of devising a new search engine to compete in the current market for searching) and the incentive to innovate which comes mostly through the possibility of monopolizing content or technology. Again, we encounter a feedback loop, this time regarding the creation of monopolies.
In the current monopolistic environment, information consumers suffer from opposing forces: On the one hand, we have an abundance of free information which requires a high level of digital literacy and attention; on the other, we have fee-based information which is based on companies’ ability to achieve monopolistic power.
There are many paths we could take to correct some of the drawbacks of the current situation. However, in this explainer I have focused on the second category mentioned above, the producers of private information. While there is a clear individual incentive to become monopolies, it stands to reason that creating a vibrant competitive market will benefit them as a group. Seeing the market function well will draw new actors onto the scene and increase visibility, competition and consumer awareness. A vibrant market will also induce innovation which is good for both sellers and buyers alike.
Catalyzing the formation of competitive information markets is challenging. At the surface level, we would need a combination of new monetization methods and business models to provide companies and entrepreneurs with practical business tools. At the deeper level, consumers need to be educated about information literacy and the promise and peril of information exchange, especially regarding personal information.
Monopolies are exemplars of market failure which necessitates regulation. Regulatory bodies were mostly dormant during the first two decades of economic development related to information markets. Current congressional hearings and discussions have yet to offer practical solutions. Traditional regulatory intervention is probably overdue; however, a ‘scientific’ approach to regulating information markets would make them more competitive. Imagine that regulation would force monopolies to offer both free and fee-based information so that the customers could choose which product to use. A vast majority would choose the free products. However, this trend could change over time based initially on two drivers: A small number of consumers of paid information who may form a critical mass for others to join later; by forcing companies to exercise full transparency about personal data usage which finances free information, some consumers may prefer privacy and payment over personal data usage by monopolies.
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This Explainer is published as part of the German-Israeli Tech Policy Dialog Platform, a collaboration between the Israel Public Policy Institute (IPPI) and the Heinrich Böll Foundation.
The opinions expressed in this text are solely that of the author/s and do not necessarily reflect the views of the Israel Public Policy Institute (IPPI) and/or the Heinrich Böll Foundation.