The Costs of Free: Commodification, Bundling and Concentration

Abstract

Contemporary technology and content markets offer users an abundance of free informational goods. The commodification of IP assets generates efficiency gains by eliminating the deadweight losses inherent to positive pricing of nonrivalrous goods. But commodified informational goods environments are often dominated by a handful of large aggregation and distribution intermediaries or even a single intermediary. These two characteristics are linked. In commodified markets, firms can generate positive revenues by adopting bundling strategies in which zero-price IP goods are distributed with positively priced complementary goods. In particular, firms in digital content markets secure rents under zero-price conditions by establishing dominant positions as “curatorial” intermediaries that supply aggregation and distribution services that reduce users’ search costs while securing user data assets for sale to advertisers. Intermediaries appear to strategically promote commodification, and the associated reallocation of market rents from content producers to content aggregators, through free distribution of content assets and lobbying and litigation activities that favor weak copyright protections. Scale economies, network effects, ecosystem effects, and learning effects tend to promote winner-take-all outcomes in the curatorial intermediary market, potentially resulting in near-term pricing and output distortions in the intermediary services market, and, given the absence of secure IP protections, longer-term output distortions in the content goods market.