The Grand Unified Theory on the Economics of Free

Techdirt recently featured an article summing up the economics of goods when scarcity is removed. Specifically, the author recommends that content creators actively encourage dissemination of their content for free. The idea is that unhampered content distribution will allow your market share to expand greatly beyond what you would have had otherwise. Moreover, not attempting to do this is also risky — if someone else does this successfully, you lose much of your potential market.

This dilemma can be modeled from a game-theoretic perspective. Suppose you have two content creators A and B. They can each follow one of two strategies. Strategy X is to charge for their content. Strategy Y is to distribute their content for free. If A uses X and B chooses Y or vice-versa, the creator that chose strategy Y will have a huge competitive edge, and thus a much greater payoff than the other creator. If A and B both choose the same strategy, they are on equal footing in the sense that neither content creator has a competitive edge over the other, assuming the content quality itself is equal. Thus, A and B will have equal payoff P. But if A and B both choose X, P will be greater than if they had chose Y. The reason for this is that you cannot charge for content you distribute for free, and you no longer hold exclusive copyright on your work.

The Nash equilibrium of this game is the case where both A and B choose strategy Y, but this is not the socially optimal situation. (The social optimum is the status quo, where both A and B choose strategy X.) However, the Nash equilibrium does benefit the consumers, who enjoy more accessible content.