Digital Goods and Services

Abstract

This chapter defines and explains several characteristics concerning digital goods and services. The most important characteristic of the digital market is that the marginal cost of production is zero, making the digital market different from traditional markets. Therefore, competition in digital markets is different. Since the marginal cost is zero, there are several examples of markets where the average return per user (ARPU) is zero (e.g., Facebook, Google Search, and free apps), setting aside standard supply/demand analysis. Digital goods and services are always non-rival since the supply is infinite and the marginal cost is zero. For the same reason, it is simple to construct product bundles of digital goods and services. When it comes to other characteristics such as commoditization and transaction costs, digital goods and services are not different from physical products.