DP3846 Digital Goods and the New Economy

Author(s): Danny Quah

Publication Date: March 2003

Keyword(s): aspatial , emergence , idea , information , innovation , intellectual asset , internet , knowledge , open source , weightless economy

JEL(s): D60 , L12 , O30 , R12

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP3846.asp

Digital goods are bit strings, sequences of 0s and 1s, that have economic value. They are distinguished from other goods by five characteristics: digital goods are non-rival, infinitely expansible, discrete, aspatial, and recombinant. The New Economy is one where the economics of digital goods importantly influence aggregate economic performance. This Article considers such influences not by hypothesizing ad hoc inefficiencies that the New Economy can purport to resolve, but instead by beginning from a Arrow-Debreu perspective and asking how digital goods affect outcomes. This approach sheds light on why property rights on digital goods differ from property rights in general, guaranteeing neither appropriate incentives nor social efficiency; provides further insight into why Open Source Software is a successful model of innovation and development in digital goods industries; and helps explain how geographical clustering matters.