role when apples are compared with oranges, but information is sold in markets that are both thin and highly specialized. We do not have price equivalents for units; we even lack clear ways to identify the relative importance of different information arenas.

Given such difficulties, we do not tally quantities of information. Rather, we combine the quantity and importance issues, and, at best, talk of information’s value. That value is most likely to be revealed in contracts between two parties engaged in bilateral bargaining, suggesting that there will be substantial instability in the outcomes. To be sure, there are information services, trade journals and the like, sold at a price. But when TI is sold in raw form, rarely is the same package sold to multiple parties at the same price. Below we observe that information is usually sold in a package with other components; for example, a modern PC chip contains numerous technological innovations. And when patents or licenses are sold, often the buyer already knows the information; the commodity purchased is the right to use it.

Giving Away the Secret. The benefit of TI is extremely difficult to judge. First, it may be difficult to know whether it will work or whether it will expand production capabilities. Second, if it does work, will it facilitate new products? What products will be wanted, and how widespread will be the demand? These questions are exceedingly difficult to answer, as contemplation of the wonders of the Internet makes clear.

This suggests that if some potentially valuable information were displayed on a shelf, it would be a challenge for the seller to price it, or for the buyer to know whether to purchase. However, unless information is securely protected, it rarely gets the equivalent of shelf display. Merely informing a potential buyer about one’s product gives away a great deal of the benefit. Hence, information is shared alongside sheaves of nondisclosure agreements, and, even then, there is selective hiding of critical components. Frequently prototypes are demonstrated, but inner workings may be hidden, much as magic stores demonstrate an illusion but not its working mechanism. But even to make it clear that something is technologically feasible is to give away a great deal; it reveals that innovation is feasible, and someone thought the effort to produce it was worth making.d

When TI is the product, fears of inappropriate use may cause both customers and technology providers to clam up. The experience of Johnson-Grace, Inc. (JG), a small firm located no more than 1 mile from this conference, is instructive. For 2 years, it has had a superior image compression algorithm, which has been prominently employed by America Online. Some potential customers (online services) have been reluctant to provide information that would enable JG to operate on their system. JG has resisted giving out source code, which would permit customers to understand better how their system worked but would also facilitate legal or illegal theft. For a period, for example, JG refused to discuss with Microsoft its product that interleaves compressed sound and video. Knowing such a product could be developed might spur Microsoft to do so.e

For most products, such as cars or television sets, the more consumers the merrier. The early consumers of such products gain as they become more widely used, say because repair facilities will be more convenient. With much TI, however, additional users diminish the value to current users. When the TI is targeted to a particular industry or product, the loss is likely to be great.

Such losses imply that those in possession of TI will be vitally concerned whether it is made available to others and, if so, how widely it will be employed. Here contracting encounters another hurdle. More than being difficult to count, information is impossible to meter; it is often beyond anyone’s capability to state how widely a technology has been disseminated. (To be sure, in some circumstances it can be licensed on a per-unit basis for a limited set of products.)

Firms that utilize their own R&D frequently do not license it to competitors, which leads to inefficiency, since, from a resource standpoint, the marginal cost of use is zero.f The consumers who benefit from the increased competition cannot be charged for their gains. Moreover, it may be impossible to limit the potential licensee to particular noncompetitive uses. Given this difficulty, firms developing TI often sell it to a single entity.

The logical extension of the single entity concept is to create a new firm to produce a particular form of TI. That is why we see so many start-up firms in the high-tech arena. Start-ups have the additional advantage of securing the majority of their benefits for the individuals who actually provide and develop the innovative ideas. Such individuals may be forced to break off from an old, larger firm because they are unable to demonstrate the extraordinary value of their ideas or because compensation policies simply can’t reward the innovators sufficiently.

Finally, R&D cannot be taken to the bank as an asset to be mortgaged. Explaining the product to the bank would be difficult and potentially disadvantageous competitively. Moreover, given the tremendous uncertainties about value, a default is not unlikely, and when there is one the asset is likely to have little salvage value.

Bundling and Economies of Scale. TI has many of the characteristics of an acquired taste. The buyer has to try it before buying. With exotic ice creams or Icelandic sagas, also acquired tastes, a relatively cheap small test can guide us about a potential lifetime of consumption. With information, by contrast, we may have to acquire a significant portion or all of the total product before we know whether we want it. A good idea packaged alone is not enough, since its merits are hard to establish. What is usually required to convince a party to purchase TI is a demonstrated concept or completed product. In effect, there are significantly increasing returns to scale with respect to investment in innovation, and if patent protection is required, there is possibly an indivisibility.

This increasing returns aspect of TI compounds contracting difficulties.g Even if there were no charge for the information, the costs of evaluating it would discourage acquisition, however desirable that would prove ex post. Much information that might be sold is not even displayed for sale. When it is, elaborate legal documents relating to such matters as nondisclosure are required (at times with lawsuits to follow). Finally, the information may be bundled into products, which can be

d  

Arrow (ref. 6, pp. 56) makes this point with respect to the development of the atomic bomb. There were severe concerns about espionage leaks when the Soviet Union produced its own bomb. However, the primary “leak” may have come from the public knowledge that the United States was able to produce a successful weapon.

e  

In January of 1996, JG was sold to America Online, its major customer. Moving to common ownership of the buyer and seller of TI is a frequent solution to the problem of contracting for TI. Before the acquisition, as they became increasingly entwined, both JG and America Online became vulnerable to “holdup” —i.e., exploitation because its value can be destroyed—by the other party.

f  

When there are significant network externalities, or other gains from extending the market, licensing is desirable. Witness the recent agreement with Phillips, Toshiba, etc., relating to the next generation of compact disk technology, and the subsidized sales of software products seeking to become the standard. Many commentators believe Apple Computer made a major mistake not licensing its superior Macintosh technologies, which it has only begun to do recently.

g  

This increasing returns feature relates to another contentious issue in technology policy. It suggests that government subsidies to R&D, in some circumstances, may enhance and not crowd out private efforts.



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