Information Goods vs. Industrial Goods: Cost Structure and Competition

Information Goods vs. Industrial Goods: Cost Structure and Competition

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Article ID: iaor20111767
Volume: 57
Issue: 1
Start Page Number: 164
End Page Number: 176
Publication Date: Jan 2011
Journal: Management Science
Authors: ,
Keywords: competition, monopolies
Abstract:

We study markets for information goods and find that they differ significantly from markets for traditional industrial goods. Markets for information goods in which products are vertically differentiated lack the segmentation inherent in markets for industrial goods. As a result, a monopoly will offer only a single product. Competition leads to highly concentrated information‐good markets, with the leading firm behaving almost like a monopoly even with free entry and without network effects. We study how the structure of the firms' cost functions drives our results.

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