What is the consumer surplus of the internet?

Annie Lowrey asks:

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge–indeed, no economist has ever really done it. Brynjolffson says it is possible, perhaps, by adding up various "consumer surpluses," measures of how much consumers would be willing to pay for a given good or service, versus how much they do pay. (You might pony up $10 for a CD, but why would you if it is free?) That might give a rough sense of the dollar value of what the Internet tends to provide for nothing–and give us an alternative sense of the value of our technologies to us, if not their ability to produce growth or revenue for us.

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Comments

That's one approach. Also, one must consider what one would be doing with their limited time when one wasn't reading Marginal Revolution, or watching YouTube, or tweeting, or Facebooking etc.

We only measure spending, we don't measure satisfaction.

So, if spending declines for a product, we assume satisfaction decreased but we may have consumed more of it at a lower price.

Or, what we may have been consuming in the past was not the product, but the distribution system and the product. The CD was a distribution product for the content product. Eliminate the CD, and you have just the content product--the music. There is a fixed cost for the creation of the content product, and no variable cost other than promotion. For the distribution on the Internet, there is negligible variable cost.

Thus, I would argue that the content provider has a much greater chance of extracting consumer surplus for just content than he did in the past. Not less.

Just ask the company that distributes the Beatles collection on a digital format to your hard drive

I would add to my comment above that when you consider the cost of the cd product, consider also the cost of its distribution system as well--eg record ann bookstores.

I would not consume anywhere near the media I do today if it cost money.

I get value out of this blog, but I would not pay even $5/month to read it.

I was actually thinking about this the other day. I have a free, daily email newsletter (linked to on my name) which has about 2,700 subscribers. I figured I could charge a monthly fee for it and probably retain a small percentage of readers. Let's say (for sake of easy math) 100 of them would pay; all the others would drop out at $0.01. Assume for sake of argument that I'd get $2.70 from the paying crowd, and that amount was otherwise optimal.

That means the consumer surplus I'm creating is $270/month or $0.10/subscriber/month. (It's not worth it for me to do this, btw.)

So yeah, you can definitely test some aspects of this.

For the digital economy, GDP per capita far from a perfect measure of welfare, and median family income may be even worse, as least as it's currently measured.

I discuss this idea in a bit on my blog, including pointers to a couple of papers with more detail and analysis.

There may also be some inconsistencies in the way people value time. Do the values that are inferred by Goolsbee and Klenow from opp cost of time on internet correspond to people's willingness to **pay** for faster service? I often wonder at those unwilling to pay $10 for a dvd who spend a lot of time downloading something they only watch once or those who won't pay a few bucks to upgrade service on cable or phones but who thereby spend several extra hours per month in waiting time.

I think that if you asked people what they were will to pay for some of the things that are now free, they would say they are willing to pay (in total for all these things) a lot more than they actually have, even more beyond what they have than they currently spend. So the data would be useless. A survey based on fictitious dollars would be useless.

mbk,

I don't know. What is the opportunity cost of barbequing, bowling, and balling?

Seems like a useless calculation to me. You might similarly say that the worth of a car in 1910 was equivalent to the worth of the 50 horses the 50 horse-power 1910 engine replaced. But since no one would buy the 50 horses any more now that cars were available what would be the point of that comparison?

"I'll bet it was more than whatever surplus there is from using the internet -- based on the simple fact that hardly anyone would have spent much time on the internet if we, free of charge, sent today's online diversions, the hardware, etc., back to 1968, 1977 or 1984."
That's a counter-factual. As long as you're assuming it you can assume your other conclusion giving a basis. In fact I think it would make more sense to base your analysis of the counter-factual on your guess about the original question.

Also, since I recall you talking about the decline of arcades, there was an article somewhere claiming that they continued to thrive in Japan rather than the U.S because we don't have dollar coins. Can't remember where I heard that though.

Yancey Ward,

that's another good point, although I'd say just as with internet use, BBQing etc falls under free time socializing and is below the threshold where it's perceived as opportunity cost. And as many have pointed out above, just as the monetary cost has gone down, the price has gone down too and quite possibly the value. And, it's true that publishing is basically free now but as with the above comment on CDs, what has become cheap is the distribution, not the production or the sales promotion. And while it's about free now to distribute content, chances are, no one will ever see it and almost certainly no one will want to pay for it. So that's why I think the internet is a huge adult playground, sort of a public square, where people produce and consume for free. That brings me back to my point, that once you consider time spent there as a cost, the internet, net (sic), is consumption.

people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it. Brynjolffson says it is possible, perhaps, by adding up various "consumer surpluses," measures of how much consumers would be willing to pay for a given good or service, versus how much they do pay. (You might pony up

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