From experience goods to search goods

There has been several measurements on how illegal downloading affects markets of cultural goods. Although the results sometimes contradict each other, there is a consensus that in fact there is a conversion of illegal downloaders into purchasers. There are several explanations offered: downloaders pay for items they were not exposed to before (the publicity value argument), downloaders are not evil, and they are willing to pay to artists they like (community support argument), downloaders are buying because there is a market they are happy to use or they are threatened to use by lawsuits (industry argument) or illegal downloads are not (good enough) substitutes for a DVD or a CD.

In this essay I would like to offer a different approach that explains the coexistence of illegal downloading and legal purchases by a shift that affects the status of cultural goods. A shift that made culture to act like a search good instead of an experience good, a shift that at the end completely rewrites the rules of cultural markets.

In the economic literature cultural goods are described as experience goods the value of which can only become apparent to its consumer after it has been consumed. Unlike drinking just another bottle of coke, one cannot tell if she liked a concert, a movie or the new album of an artist until she has experienced it. This attribute of cultural goods defines a very special economic context to these goods as this uncertainty on the experience creates a factor of risk on the consumer side, a risk which heavily affects prices and demand for the goods, thus creating a risk for the supply side as well.

There are several methods by which both the consumers and the suppliers try to lower the level of uncertainty on the demand side. On the consumer side listening to word of mouth and peer reviews and the general avoidance of things unheard of and unknown are the tools to reduce the risk of paying for something that might turn up as a bad experience. Suppliers give away free previews in form of trailers, teasers; a whole media system of commercial radio airs these goods in exchange for commercials; professional or paid reviewers are writing about these goods; charts and top-lists are complied; massive multi-million dollar marketing campaigns are launched; stars with known reputation are bred and employed. These techniques are designed to provide the potential consumers with extra information and thus lower their uncertainty.

Today the efforts and resources of cultural industries are equally divided between the production of cultural goods and their marketing. Production costs are in the same range as marketing budgets and the marketing has spawn a distinct culture of celebrities and parasite media dealing with celebrities, reinforced by the cross-ownership of media conglomerates in every media type.

Despite all these efforts consumers might end up not being satisfied. There are several signs of this ‘post-coital sadness’: bad reviews on blogs, quickly dying films after the opening weekend, weak DVD rentals and sales and falling reputation of stars. This signals the distance between the actual and the promised experience, the size of the information asymmetry between the consumer and the supplier.

With the advent of file-sharing technologies this situation has changed. The risk of consuming a cultural good is not a financial risk anymore if one can download a song freely before purchasing it. Of course there are costs still associated with consumption: the cost of acquiring information about a good, the cost of searching, the cost of downloading, the cost of possible lawsuits, etc., but one does not have to pay at the counter only to realize that all the other songs on that album are not at all that good as the one played all the time on the radio, or that the trailer actually contains every enjoyable second of a feature film. Consuming a cultural good for free is the cheapest way to get to know the actual value of it. As the risks of consuming something unknown decrease, cultural goods shift to be search goods in economic terms, as no transaction is takes place before the actual experience.

But that does not mean that market transactions cannot and will not happen afterwards. But in this case a purchase will happen only if the consumer had a positive experience, when she actually had full information on the goods that she was about to purchase.

Will this shift result is a loss in sales? Well, the supplier will lose only the sales that were happening only because the information asymmetry – in other words sales that at the end resulted in an unhappy customer. Will new sales occur? Certainly, from consumers for whom the risk of paying for something unknown was too high of an entry barrier to make the actual purchase in the first place. Illegal downloading is lowering the entry barrier of consumers to markets.

Many still argue that illegal downloading is actually replacing or rather killing markets. I would argue that the efforts trying to keep cultural goods as experience goods are killing markets. Trailers, paid-for radio broadcasts, 30 second online listening-in services do not lower the uncertainty barrier enough to draw significant amount of new customers to markets outside of the mainstream. And for those consumers who are free-riding on this system will eventually face a serious problem: the end of supply of the goods they actually liked but never paid for.