My last post got linked with a very flattering writeup on Techdirt, which is pretty awesome. The conversation in the comments, however, is a bit disappointing. A lot of people still think that giving away the infinite goods means you give away everything. They think that by giving away the content, you make it impossible to make any money on anything related to the content.
This is completely untrue. There many differences between scarce and non-scarce goods. The important one here is that the marginal cost (the cost to make one additional unit) of a scarce good is greater than zero, while the marginal cost of a non-scarce good is either zero, or close enough to zero to no longer matter.
Cheap or free goods have always been used to increase the value of more expensive goods. For example, I worked at Boater’s World in Annapolis in high school. One of my managers used to tell the young associates, “Whenever someone drinks a soda or a beer on the Chesapeake Bay, I want it to be in a Boater’s World can coozie“. He gave them away all the time to good customers, or to someone making a large purchase. The can coozies are cheap – Boater’s World charges 99 cents, so I imagine they cost something like 25 cents. But sometimes a free coozie is just the thing someone needs to decide to buy that expensive new fishfinder. And it’s always good to have things out there advertising the name of your business.
Of course, Boater’s World loses some money by giving the coozies away. But in return, they have a sale on a larger item, and a satisfied customer, and marketing materials out where people can see them. Even if you make the false assumption that every coozie you give away is a lost sale, meaning the marginal cost to the store is 99 cents rather than 25, it doesn’t take many large purchases by happy customers to recoup the losses.
But does giving away the coozies prevent all sales of anything else? Of course not. It also doesn’t force Boater’s World and all of its suppliers out of business. And this is a situation where the marginal cost of the giveaway item is greater than zero, so the store does take a real loss when it gives them away. Imagine how much better it would be for Boater’s World if the coozies cost them nothing to produce?