The Information Economy
by Hal R. Varian
Dean, School of Information Management and Systems
University of California at Berkeley
Advances in computers and data networks inspire visions of a
future "information economy"' in which everyone will have access to gigabytes of
all kinds of information anywhere and anytime. But information has always been a
notoriously difficult commodity to deal with, and, in some ways, computers and high-speed
networks make the problems of buying, selling, and distributing information goods worse
rather than better.
To start with, the very abundance of digital data exacerbates the most fundamental
constraint on information commerce --- the limits of human comprehension. As Nobel
laureate economist Herbert A. Simon puts it: "What information consumes is rather
obvious: it consumes the attention of its recipients. Hence a wealth of information
creates a poverty of attention, and a need to allocate that attention efficiently among
the overabundance of information sources that might consume it." Technology for producing and distributing information is useless
without some way to locate, filter, organize and summarize it. ...
 The evolution of the Internet itself poses serious problems. .. Workable
business models for interconnection---who pays how much for each packet transmitted, for
example---have yet to be developed. If interconnection
standards are developed that make it cheap and easy to transmit information across
independent networks, competition will flourish. If technical or economic
factors make interconnection difficult, so that transmitting data across multiple networks
is expensive or too slow, the largest suppliers can offer a significant performance
advantage; they may be able to use this edge to drive out competitors and monopolize the
market.
Similar problems arise at the level of the information goods themselves. There is a
growing need for open standards for formats
used to represent text, images, video and other collections of data, so that one
producer's data will be accessible to another's software. As with physical links, it is
not yet clear how to make sure companies have the right economic incentives to negotiate
widely usable standards.
In addition to standards for the distribution and manipulation of information, we must develop standards for networked economic transactions: the
actual exchange of money for digital goods. ...
Even when the financial infrastructure becomes widely available, there is still the
question of how digital commodities will be priced.
Will data be rented or sold? Will articles be bundled together, as is done today in
magazines and newspapers, or will consumers purchase information on an article-by-article
basis? Will users subscribe to information services, or will they be able to buy data
spontaneously? How will payment be divided among the various parties involved in the
transaction, such as authors, publishers, libraries, on-line services and so on? Not one
of these questions has a definitive answer, and it is likely that many market experiments
will fail before viable solutions emerge. ...
All this discussion about managing, distributing and trading in information is
overshadowed by the more fundamental issue of how much data authors and publishers will be
willing to make available in electronic form. If intellectual
property protection is too lax, there may be inadequate incentives to
produce new electronic works; conversely, if protection is too strict, it may impede the
free flow and fair use of information. ...
I believe that extending existing copyright and patent law to apply to digital
technologies can only be a stopgap measure. Law appropriate
for the paper-based technology of the 18th century will not be adequate to cope with the
digital technology of the 21st century. ...
Faced with such a daunting list of problems, one might be led
to question whether a viable information economy will ever take shape, but I believe there
are grounds for optimism. During the 1980s, 28,000 for-profit information libraries sprang
up in the U.S. alone. Every week more than 50 million people visit these facilities, where
they can rent 100 gigabytes of information for only two or three dollars a day.
Although these video rental stores faced
many of the same problems of standards, intellectual-property protection, and pricing that
the Internet faces today, the industry grew from nothing to $10 billion a year in only a
decade. Ten years from now we may find the economic institutions of the information
economy a similarly unremarkable part of our day-to-day life.
Note The
full text of this article originally appeared in the September 1995 Scientific American (p 200-201). It was then
published in the January/February 1996 Educom Review
(p 44-46), where I first read it. I found a digital copy at the author's site at
Berkeley: The Information
Economy: Economics of the Internet, Information Goods, Intellectual Property and Related
Issues. I'm reprinting this excerpt to tempt you to go there and read more.
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