Some Economic Aspects of Information

Carsten Orwat
Electronic manuscript published online in 2000, Jena: University of Jena, Department of Economics

Information as a commodity has some specific, intertwined economic attributes that differentiate the markets of information from traditional ones.

Increasing Returns to Scale

In the context of production, information is characterized by increasing returns to scale since the same information once produced and used can be used again and again regardless of the scale of production. For instance, despite the circumstance that an addition of conventional inputs leads to proportionally increasing outputs, an addition of another unit of the same information adds nothing.

A specific amount of units of information is used as input factor independent of the scale of production. This results in increasing returns to scale (Wilson, 1975). However, without properties of convexity, increasing returns to scale have implications on the functioning of the price system to reach a competitive equilibrium.

Since the same unit of information can be used again and again by the same or by a different user, the cost of information production is not dependent on the scale on which the information is used (Arrow, 1962, 1996, 1999; Lamberton, 1996). Since there are generally relative high fixed costs of establishing an economic unit for the production of information and the marginal cost of providing a unit of information is far less than the average costs of information production, many types of information have large scale economies. It is less costly when a single supplier provides the commodity. The consequence is characterized by natural monopoly aspects and markets may fail to produce them on an efficient level (Shapiro, 1983; Shapiro & Varian, 1999).

The existence of economics of scale in production involve significant indivisibilities in production. However, with indivisibilities prices do not longer detect optimality (Scarf, 1994).

Information Access and Information Processing

In many cases, information pertains to the object of economic exchange but also to the context of the object, for instance, to the quality level of a traded product. Therefore, the use of the core information in a purposeful way requires a sufficient amount of context or background knowledge of the information recipient that is necessary to process, understand, and evaluate the core information.

For instance, the information about specific amounts of company emissions only has a value if the recipient has a certain relevant knowledge of the evaluation of the environmental impacts of those emissions. The limitations and uncertainties of environmental knowledge, the limited endowment of environmental knowledge, time, personnel resources, or other capabilities necessary for the sufficient acquisition and application of this knowledge leads to problems of information access and processing not only on the sides of the information recipients but also on the side of the transmitters, or the companies respectively.

As Arrow (1979) argues, the acquisition of data by an individual requires information costs, in particular time and effort. The possibility of reducing these information costs is limited by the ability of the individual’s assimilation of information that is itself constrained by the capability of information-processing.

Related to this, if information is considered as an economic commodity, information itself has attributes of an experience good. Individuals intending to obtain information either by purchase or production cannot know in advance the costs and benefits of certain types of information before they have acquired it. To ex ante maximize the net returns of information or knowledge acquisition, they would need this information. Without social contrivances (e.g., reputation or information reviewers), individuals cannot know prior to acquisition if the information is useful and valuable. This is only possible during, or after the use of the information. This situation is also referred to as ‘information paradox’ (Arrow, 1962).

Furthermore, the costs incurred to obtain the information are ‘sunk costs’; once spent they have no relevance to the extent to which the information is used. As a result, individuals only bear the costly acquisition of information until experiences stop them from wasteful expenditures. Therefore, it is likely that information is not obtained to the extent which would be necessary for complex operations (Kasper & Streit, 1998, p. 54-56).

Excludability and Rivalry of Information Use

Knowledge and information are often seen as a public good because many types of knowledge can be used jointly and provides externalities to other individuals. However, whether information should be seen as a public rather than a private good depends on the type of information and its legal treatment (Lamberton, 1996).

Since in certain cases the use of information does not diminish its usefulness for other individuals, many types of information have a non-rival character. However, rivalry in information use may exist when the first or sole possessor of the information has a competitive advantage from the exclusive use of the information, such as trade secrets, business knowledge, or company-specific technological knowledge (Mackaay, 1990).

Regarding to the second public-good attribute, excludability in information use can, in principle, be established by secrecy (Mackaay, 1990). Furthermore, for some types of knowledge intellectual property rights like patents, copyrights, or company and trade secret laws can establish (sometimes imperfect) excludability.

Excludability offers the producers of knowledge economic rents such as monopoly profits to set incentives for the production of knowledge (Hirshleifer, 1973; Dasgupta & David, 1994; Arrow, 1996). These conditions are particularly relevant to the technical or organizational knowledge of companies. The private good attribute may also come from the fact that these types of information are highly individualized (Mackaay, 1990).

Related to this, excludability is established by the cost of information access and processing for outsiders, that are (opportunity) costs such as previous knowledge, skills, or time resources necessary for individuals to acquire, process, and understand the released information (similar Kennedy, Laplante & Maxwell, 1994). These types of information can be seen as private goods unless the producers deliberately release them or legal requirements force companies to publicly release the information.

After the voluntary or enforced release of information, the characteristic of information may resemble more of a public good. Excludability is particularly difficult to maintain for information which have the purpose of being shared with others to obtain the accumulation of knowledge (Mackaay, 1990).

Excludability is also hampered by the low costs of transmitting and copying of the relevant information which makes it difficult for the information producer to appropriate the benefits of the knowledge production (Arrow, 1962).

In contrast to the company-specific technical and organizational knowledge, scientific knowledge has more of the characteristics of a public good because it is often costly or socially undesirable to exclude its use. The value of many types of scientific knowledge is not depleted by joint use and, in fact, often cumulatively adds to its value (Dasgupta & David, 1994; Stephan, 1996; Callon, 1994).

Within a market mechanism, producers of scientific knowledge are not sufficiently able to appropriate the value of their produced knowledge because they cannot establish excludability (the ‘free rider’ problem). To address the resulting underproduction of scientific knowledge, direct governmental involvement or priority incentive schemes have to be established. For instance, the scientific incentive scheme of priority induces fast disclosure of scientific knowledge by allowing producers to secure the (informal) intellectual property rights of their discoveries and inventions (Dasgupta and David, 1994).

Positive externality emerges when some market participants acquire information (Hirshleifer, 1971). With the help of an information improvement the market participants make better economic decisions, such as purchasing lower-price or higher-quality products, and the entire market improves by better discipline (Salop & Stiglitz, 1977). Uninformed participants may act as a ‘free rider’ of the market improvement and the private demand for this information is too low (Shapiro, 1983).

Joint Production and Asymmetric Distribution

Some types of private company information are the result of the joint production or use of the object to which the information refers. The types of information arise as by-products of economic activities (Arrow, 1962). For example, producers can obtain insights about the material and energy flows to and from their production processes. This implies that in most cases companies are the least-cost producers of the relevant information.

However, the joint production also has the effect that a situation of asymmetrically distributed information emerges because the producer of the relevant goods and services obtains an information advantage (e.g., Ballwieser, 1993).

This information advantage together with the high measurement costs leads to situations of ‘asymmetric information’ (Barzel, 1995) which may require particular institutional arrangements (for example, certification) to avoid market inefficiencies (Shapiro, 1983).


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