Economics of Abundance
In a now famous October 2004 article, Chris Anderson tells Wired readers that the future of entertainment is in “millions of niche hits at the shallow end of the bitstream”.
To demonstrate this, Anderson uses the example of Rhapsody’s “power law” demand curve, which looks like that of many record stores in its concentrated distribution of top tracks with a quick drop off in demand for less popular ones. Yet, it differs in that demand never reaches zero.
Anderson argues that demand is typically highly concentrated because many individuals lack ample information about products that fall outside the mainstream which causes them to wind up sticking with what they know in order to play it safe – a phenomenon he dubs the ”economics of scarcity”.
One obvious issue with that particular example is that Rhapsody is an unlimited subscription based music service; like in the case of an-all-you-can-eat buffet, it offers a low risk opportunity to try new things. Penetration of niche products and services is likely to be highest in markets that not only create economies of scale for merchants in distribution costs, but also, provide low risks to the user in trying out unknown items.
Yet, even in the case of when a user can try additional incremental goods at no charge , a is a certain number of free options that will render additional free goods useless. Similarly, adding additional suppliers to a market where demand is both perfect and unwavering, creates a situation in which the net excess remains unsold.
The widespread belief that online demand could be a never-ending power law demonstrated the extent that the unprecedented demand for online goods accelerated – particularly when considered in relation to the traction traditional businesses had made in following their customers online.Opportunity in the e-commerce industry appeared to be near infinite. Yet, in reality, the laws of supply and demand have not changed.
Addressable demand for niche items just initially expanded faster than supply as low distribution costs led to exponential growth in the size of the addressable market. Given that the opportunity to serve the niche markets sprung up rapidly, early visionaries were rewarded with more demand then they could manage to serve and the new “economics of abundance” enabled consumers to expand their purchase comfort zones. In due time, the opportunity to enjoy increasingly personalized and rare items will become another baseline expectation for consumers, butit remains unclear whether increased choices will make consumers happy, help businesses grow or merely serve to distract both groups.
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Your last portion about digital music reminds me of a strategy I’d like to see tested for itunes (and other music services) where you’re basically allowing a “free-market” to determine prices. Obviously you’d have certain restrictions for specific artists. And I know part of the power of itunes is the simplicity (which includes the simplicity of price), but for those artists who are willing and do not receive many downloads, lowering the price through (a partial) free market would be an interesting test. Thanks for the post!
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