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A GENDA Final Thesis Free economy Christian Dahlhausen Prof. Dr. Rainer Clement Prof. Dr. Dirk Schreiber IntroductionTraditional EconomyDigital EconomyFree EconomyConclusion 2 Fachhochschule Bonn-Rhein-Sieg University of Applied Sciences Fachbereich Informatik Department of Computer Science

 Technology -driven change in economics  Potentially unlimited supply of digital goods  Attention becomes scarce resource  Given rise to free business models 3 I NTRODUCTION Picture: Anderson, Chris: [ ]

4 Picture: Alex Mitrani (2007): [ ]

 Limited supply  Unlimited demand  Law of demand and supply  Market mechanism of coordination & ownership  Price takers vs. price makers Figure: Craven, John (1990): Introduction to Economics, p.61 5 T RADITIONAL E CONOMY Supply, Demand & Equilibrium

 Choice under scarcity  Self interest vs max profit  Max Utility with limited budget  Substitute & Income effect influence demand Figure: Mankiw, N. Gregory and Taylor, Mark P. (2006): Microeconomics: Microeconomics, p T RADITIONAL E CONOMY Consumer Behavior

7 Picture: Donna Bogatin, (2007) CNET: [ ]

 High first-copy costs (Fixed costs)  Low marginal costs  Declining infrastructure costs (processing, storage, bandwidth)  Economies of networks  Abundance rather than scarcity  Amazon: 2,3 Mio books  Bookshop: books Figures: compiled by author, based on Stahler (2001): Geschaftsmodelle in der digitalen Okonomie, p D IGITAL E CONOMY D IGITAL GOODS HAVE …

 Network effects  Switching costs & lock-in  Durable purchases (e.g. printer)  Specialized suppliers (e.g. ERP software)  Search costs (e.g. cell phone plans)  Loyalty programs (e.g. Tesco, real, etc.)  System effects  Standards Figure: compiled by the author, based on Aufderheide, et al. (2006): Internet Okonomie, Wettbewerb und Hybriditat beiEssential Facilities, p D IGITAL E CONOMY C HARACTERISTICS

10 Illustration by Jeff Mermelstein

 Over-supply  Increasing storage & processing capacity at decreasing costs  Unlimited “shelf-space” of digital businesses  Demand  Irrational behavior with free products  No cost-benefit analysis at zero price  Difficult to map utility  No-cost = no disadvantage  Power of competition  Webmail: Google & Yahoo  Critical mass crucial 11 F REE E CONOMY C HARACTERISTICS

Razor-and-blades model 1% Rule Flickr, Wikipedia Freemium Old-media Business model Washington Post: Increasing viewers after free acccess Google AdSense, Amazon Affiliate, Craigslist Advertising Loss leader strategy Signaling/marketing function in online music Cell phone contracts, technobrega, DVD Hits Cross subsidies Pictograms: Anderson, Chris (2008): 12 F REE E CONOMY B USINESS M ODELS

Digital distribution almost costless (P2P) Disintermediation = saving unnecessary cost Online music Zero marginal costs Reciprocal behavior Shift of production to the crowd (Crowdsourcing) GMX, Yahoo answers, Wikipedia, Goog-411 Labor exchange Mutual benefit through increasing utility Altruism as motivation Freecycle, Open Source Software Gift economy 13 F REE E CONOMY B USINESS M ODELS

14 C ONCLUSION Traditional economy Economies of scale Communication networks Web not available State & Market as coordinators Digital Economy Econom ies of networks Information networks Read-only web Diminishing barriers through internet Free Economy Economies of attention Collaboration networks Read-write web Three processes: Peer Production Peer Governance Peer Property

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