The Economic Properties of Software

Abstract:     
Software is a good with very special economic characteristics. Taking a general definition of software as its starting-point, this article systematically elaborates the central qualities of the commodity which have implications for its production and cost structure, the demand, the contestability of software-markets, and the allocative efficiency. In this context it appears to be reasonable to subsume the various characteristics under the following generic terms: software as a means of data-processing, software as a system of commands or instructions, software as a recombinant system, software as a good which can only be used in discrete units, software as a complex system, and software as an intangible good. Evidently, software is characterized by a considerable number of economically relevant qualities - ranging from network effects to a subadditive cost function to nonrivalry. Particularly to emphasis is the fact that software fundamentally differs from other information goods: First, from a consumer’s perspective the readability and other aspects concerning how the information is presented, is irrelevant. Second, the average consumer/user is interested only in the functionality of the algorithms but not in the underlying information.

Number of Pages in PDF File: 27

Keywords: digital goods, compatibility, information good, network effects, nonrivalry, open source, recombinability, software

JEL Classification: D82, D83, D62, D85, K11, L17, O34

working papers series