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distribution costs are more or less proportional to the number of people who receive the product. In other cases, such as broadcasting (whether from television stations, radio stations, or direct broadcast satellites), distribution costs depend only on the size of the geographic area to which the signal is transmitted rather than on the number of people who receive the signal. In still other cases, distribution, although not exactly free, is nearly costless. A prominent example is distribution of documents, music, and pictures over the Internet, where the actual costs of the transmissions are often well below one cent. These costs are so tiny that they are typically not worth monitoring and billing on a per-transmission basis.


A consumer incurs costs to use an information product, in addition to the purchase price. Such costs refer to the materials and equipment that a consumer must buy to make use of an information product. Examples include a television set, a radio, an audio system, a computer with modem, and transportation to the theater. Although these costs can be regarded as part of the distribution system, separating them from the distribution costs is useful because the consumer, not the information producer or distributor, decides whether to incur them.

The important feature of these consumption costs is that they are highly variable across different types of information products. For example, a consumer must pay much more to use the Internet to read the newspaper at home than to read the hard-copy version. (In the latter case, the only consumption cost is either storing or disposing of the used copy.) An important feature of electronic distribution of information products is that it reduces distribution costs (and, where relevant, storage costs) but usually increases other consumption costs.

Information Supply: Compensating Information Creators

Although some people create new information as an act of pure self-expression, perhaps seeking recognition but expecting and receiving no compensation (some Web sites and almost all personal conversations are of this type), most participants in the business of information creation expect compensation. They will not produce new information products unless the amount of compensation is sufficient to justify spending time and resources in this endeavor.

An appropriate conceptualization of the first-copy cost mentioned above is the amount that the creators of new information products must be paid to induce their creative effort. If compensation is required to

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