Transaction Costs
Why are so many things in the information 'economy' free? And what role do declining transaction costs play in Peer Production?
Understanding transaction costs in general, and the cost of money in particular, helps a great deal in explaining why so much of the landscape of information goods and services has transitioned so rapidly toward a “free” (i.e. non-monetary) approach.
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Discussion
From Anomalous Presumption at http://jed.jive.com/?p=10 :
The author first explains that contemporary money is virtual, and therefore prone to fraud, which requires uncompressible suppression costs.
He continues:
In the case of “frictionless” network activities:
"Exponential declines in the cost of network bandwidth, storage, and computation are driving the cost of producing and distributing many services and information goods toward zero. The costs of processing transactions involving virtual money can ride these same exponential cost curves down toward zero. However the cost of enforcing honest monetary transactions cannot follow the same cost curve. Enforcement cost is constrained by the potential for fraud and error, and we can’t just depend on automated enforcement mechanisms because they are always open to automated theft and fraud.
The result is that as information goods and services become cheaper, they encounter a threshold where their price is so low that the enforcement cost of monetary transactions is greater than the value of the transaction. At this point there are two alternatives: they can stop following the declining cost curve, or they can be transferred through non-monetary transactions. While some goods and services have stopped following the curve, many have become “free” (i.e. supported by advertising and/or voluntary contribution). Advertising is a common example of a non-monetary transaction – the consumer “pays” some attention to the ad in exchange for the good or service. Voluntary contributions are more subtle, but we can consider them transactions in which the consumer “pays” attention to the producer themselves – the way we pay performers with applause and credit.
In one sense this is a normal, economically rational process, and it certainly fits Coase’s general framework of transaction costs. The peculiar thing about this case, however, is that it excludes money itself from the transaction process on fundamental economic grounds, indicating that there are intrinsic problems with using monetary value as a metric for transactions.
Note that as the likelihood of significant loss through fraud or error increases, the minimum value for feasible transactions also increases. It is especially hard to judge the value of contracting for unique goods. Thus in cases of one-time production of information goods such as software, encyclopedia articles, or commentary on current events, the threshold will be much higher than for transactions with frequently replicated outcomes.
Understanding transaction costs in general, and the cost of money in particular, helps a great deal in explaining why so much of the landscape of information goods and services has transitioned so rapidly toward a “free” (i.e. non-monetary) approach." (http://jed.jive.com/?p=10)