From “experience” goods to “search” goods
An alternative explanation to the success of file-sharing networks and the radical reconfiguration of cultural markets in the online environment
There have been several studies on how illegal downloading affects the market of cultural goods. Although the results sometimes contradict each other, there is a consensus that in fact illegal downloaders become purchasers. There are several explanations offered: downloaders pay for items they were not exposed to before (the publicity value argument); downloaders are not evil, they are willing to pay for music made by artists they value (community support argument); downloaders are buying because there is a market they are happy to use or they are threatened by lawsuits (industry argument); or downloads are not substitutes for the value of owning a DVD or a CD.
In this article I would like to offer a different approach to explain the coexistence of illegal downloading and legal purchases by explaining a shift that affects the status of cultural goods. This shift explains the way that cultural goods become ’search’ goods instead of ‘experience’ goods, a shift that ultimately rewrites the rules of cultural markets.
In economic literature, cultural goods are described as ‘experience’ goods because their value can only becomes apparent to the consumer after they have been consumed. Unlike drinking just another bottle of coke, one cannot tell if a person liked a concert, a movie or a new album until he or she has ‘experienced’ it, attended the concert, watched the movie, or listened to the album. The way that cultural goods are consumed thus creates a very special economic context of use; the uncertainty of the experience creates an element of risk on the consumer’s side, a risk which heavily affects the prices and demand for cultural goods, thus also creating a risk for the suppliers of these goods.
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, methods are created to reduce the risk of paying for something that might turn out to be a ‘bad’ experience. The consumer, for example, could find out about the quality of the good from those who have experienced it themselves and so a type of peer review system is established. Alternatively the conservative consumer can generally avoid goods which are unheard of or unknown.
Suppliers, on the other hand, give away free previews in the form of trailers or teasers; a whole media system of commercial radio broadcasts information about these goods in exchange for commercials; professional or paid reviewers are writing about these goods; charts and top-lists are instituted; massive multi-million dollar marketing campaigns are launched; stars are bred and employed. These techniques are designed to provide potential consumers with extra information and thus lower the risk of being disappointed when buying an ‘experience’ good.
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 marketing has spawned a distinct culture of celebrities and parasitic media dealings with celebrities, reinforced by the cross-ownership of media conglomerates in every media type.
Despite all these efforts consumers might still not be satisfied. There are several signs of consumer disappointment: scathing reviews on blogs, fast plunging audiences after the opening weekend of a film and pathetic DVD rentals or sales. 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 no longer a financial risk 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 the goods, the cost of searching, the cost of downloading, the cost of possible lawsuits, the list can go on. The benefit, however, is that the consumer need not have to pay at the counter only to realize that all the other songs on the album they have just bought are not at all as good as the one played incessantly on the radio, or that the trailer actually contains every enjoyable second of a feature film. The consumption of a cultural good for free offers the lowest risk option of getting to know the actual value of it. As the possibility of consuming something unknown decreases, cultural goods shift to be ’search’ goods in economic terms, as no transaction takes place before the actual experience.
But that does not mean that market transactions cannot and will not happen afterwards. In this case a purchase will happen only if the consumer has had a positive experience, when the consumer actually has a full set of information regarding the quality of the goods that he or she is about to purchase.
Will this shift result in a loss of sales? Well, in this case, the supplier will only lose on the sales that were happening because of the information asymmetry ‘ in other words sales that result in an unhappy customer. Will new sales occur? Certainly, sales transactions will take place by consumers for whom the risk of paying for something unknown was too high of a barrier to entry to make the actual purchase in the first place. Illegal downloading is lowering the barrier to entry of consumers to markets.
Many still argue that illegal downloading is actually replacing, or rather, killing markets. I would argue that the efforts of trying to keep cultural goods as experience goods are killing markets. Trailers, paid-for radio broadcasts and 30-second online listening-in services do not lower the uncertainty barrier enough to draw a significant amount of new customers to markets. And the consumers who are free-riding on this system will eventually face a serious problem: the end of the supply of goods they actually liked, but never paid for.