Innovation Incentives for Information Goods

27 Pages Posted: 12 Dec 2009 Last revised: 29 Oct 2014

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Xiaoquan (Michael) Zhang

Hong Kong University of Science & Technology (HKUST); Massachusetts Institute of Technology (MIT) - Center for Digital Business

Date Written: December 7, 2009

Abstract

Innovations can often be targeted to be more valuable for some consumers than others. This is especially true for digital information goods. We show that the traditional price system not only results in significant deadweight loss, but also provides incorrect incentives to the creators of these innovations. In contrast, we propose and analyze a profit-maximizing mechanism for bundles of digital goods which is more efficient and more accurately provides innovation incentives for information goods. Our “statistical couponing mechanism” does not rely on the universal excludability of information goods, which creates substantial deadweight loss, but instead estimates social value created from new goods and innovations by offering coupons to a relatively small sample of representative consumers. We find that the statistical couponing mechanism can operate with less than 0.1% of the deadweight loss of the traditional price-based system, while more accurately aligning incentives with social value.

Keywords: Digital Goods, Bundling, Innovation, Incentives, Mechanism Design, Information, Online Content

Suggested Citation

Brynjolfsson, Erik and Zhang, Xiaoquan (Michael), Innovation Incentives for Information Goods (December 7, 2009). MIT Sloan Research Paper No. 4780-10. Available at SSRN: https://ssrn.com/abstract=1519899

Erik Brynjolfsson (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiaoquan (Michael) Zhang

Hong Kong University of Science & Technology (HKUST) ( email )

Department of ISOM
Clearwater Bay, Kowloon
Clear Water Bay, Kowloon, Hong Kong
Hong Kong
+852-6081-2330 (Phone)

HOME PAGE: http://mikezhang.com

Massachusetts Institute of Technology (MIT) - Center for Digital Business ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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