مقاله سال ۲۰۱۶

The price of a product is proportional to the cost of production. According to traditional economic theories, businesses pursue profit maximization, where the price of a product is proportional to marginal cost rather than fixed cost. However, the price of digital content products, unlike traditional products, is uniquely determined. A myriad of digital content, such as information available through search engine services and Internet newspaper articles, are offered free over the Internet.

As stated in a number of literatures, including Shapiro and Varian (1999), unlike traditional products, digital content can be offered free because the marginal cost required for additional production is close to zero. Yet, although the marginal cost for digital content is almost zero, a lot of fixed cost is incurred during early production. As shown in the studies of Shapiro and Varian (1999) and Lee et al. (2006), fixed cost is reflected in the price of a product, which deviates from the traditional economic theory.

Nevertheless, another reason that digital content can be offered free is due to advertising sales. Because content providers place advertisements on the homepage that offers digital content and are thus able to gain sales from advertisers, they can offer digital content at a price lower than the actual price or for free. Gallaugher et al. (2001) and Fan et al. (2007) explain that as traditional newspapers or media firms transform their business strategy to that of the Internet, homepage advertisements become a new revenue stream, thus allowing content to be offered free. In another study, Parker and Van Alstyne (2005) showed that information goods traded in a two-sided market can also be offered at a reduced price or free to the users.