Choosing Terms and Conditions
- Suppose you are the owner of some intellectual property. How should you think about the terms and conditions under which you will make your product available?
- First, recognize the fundamental tradeoff between control and customer value. The more liberal you make the terms under which customers have access to your products, the more valuable it is to them. (The reverse of also true.)Example
- The fact that terms and conditions increase the value of the product has two effects:
- First, you can charge a higher price.
- Second, more consumers will want to buy it
- Mitigating Factors: More liberal terms and conditions make more competition for your product (rental markets and retail markets cut into sales of the originals, which reduce revenues) Consumers are willing to pay less for your product when there are close substitutes available, such as used copies.
- Challenge of Intellectual Property Management: Balancing these two effects -- choosing the terms and conditions that maximize the value of your property. (The more generous the terms on which you offer your intellectual property, the more you can charge, but the less you sell.)
The Analytic of Rights Management
To examine this tradeoff, use the supply and demand curve.
- In the discussion, ignore production costs, since unit costs are very low for most information goods and negligible for purely digital goods.
- Your goal is to maximize your revenues.
- Standard Tradeoff: High price leads to low volume.
- You should (After good marketing study) find a price which maximizes revenues (shaded box).
- Offering more liberal terms and conditions increases the value of the product to consumers. (Shifts the demand curve up)
- However: the more liberal the terms and conditions, the more copying and sharing and the less the producer will sell.
- Demand curve is now twice as steep as originally. Every consumer is willing to pay twice as much for the intellectual property offered under more liberal terms and conditions. However, the producer sells less. (Author assumes 50 percent)
- The new revenue box in twice the length and half the width of the old box --- revenue is unchanged)
- Key: If the more liberal terms and conditions reduce sales by more then 50 percent, than revenue decreases. However it the sales are reduced by less than 50 percent, revenue increases. Example Example
Transaction Costs
- Definition: The costs that the producer (or consumer) pays to make the transaction happen. Example Example Example Example
- As an owner of an information good, you should ask yourself: Is it cheaper for me to distribute my product to the end-user or is it cheaper for the organization to distribute my product to the end user.
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