Blame it on the binding constraint.
Let me explain. Has it ever struck you how peculiar it is that the price of so much writing these days is zero? No, I don’t mean that it is suprising that blogs don’t charge a price. There is so much supply that competition drives the price down to zero.
What I mean is, why are so many blogs priced at exactly zero. It would be a complete fluke for the optimal price of all of the blogs in the world to be at exactly the same number, zero.
And indeed the optimal price is not zero, in fact the optimal price is negative. Bloggers have such a strong incentive to have their writings read that they would really like to pay their readers. But for various reasons they can’t and so the best they can do is set the price as low as possible. That is, as it often happens, the explanation for the unlikely bunching of prices at the same point is that we are all banging up against a binding constraint.
(Why can’t we set negative prices? First of all, we cannot verify that you actually read the article. Instead we would have people clicking on links, pretending to read, and collecting money. And even if we could verify that you read the article, most bloggers wouldn’t want to pay just anybody to read. A blogger is usually interested in a certain type of audience. A non-negative price helps to screen for readers who are really interested in the blog, usually a signal that the reader is the type that the blogger is after.)
Now, typically when incentives are blunted by a binding constraint, they find expression via other means, distortionary means. And a binding price of zero is no different. Since a blogger cannot lower his price to attract more readers, he looks for another instrument, in this case the quality of the writing.
Absent any constraint, the optimum would be normal-quality writing, negative price. (“Normal quality” of course is blogger-specific.) When the constraint prevents price from going negative, the response is to rely more heavily on the quality variable to attract more readers. Thus quality is increased above its unconstrained optimal point.
So, the next time you are about to complain that the blogs you read are too interesting (at the margin), remember this, grin and bear it.
11 comments
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August 14, 2009 at 1:04 am
dph
Perhaps I am dense…
I understand the argument about the clustering around a binding constraint, and I find that compelling. But I don’t understand what utility comes from supplying writing (spending your time) and paying your reader to read (spending your money). Is it a signaling and affiliation benefit? Is it a self-identity benefit that offsets the negative utility?
Regardless, I like the high-quality writing I benefit from, now to just find a couple more hours in my day so I can read more high quality stuff.
August 14, 2009 at 5:36 pm
Etl World News | Assorted links
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August 14, 2009 at 6:19 pm
mike
Or you could buy ads. Don’t pay the readers directly, instead pay someone to find you more readers that would be interested in you.
August 15, 2009 at 9:01 am
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August 15, 2009 at 7:32 pm
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August 16, 2009 at 11:04 am
dan
Two other possible explanations:
1) Ambiguity aversion: If Jeff offered 10c/reader, there is an unknown probability his blog goes viral. He knows what the outcome is from charging zero.
2) Preferences are perfectly inelastic about p=0. People won’t bend over to pick up dimes — small deviations from zero price won’t change behavior.
August 16, 2009 at 6:08 pm
zach
Also, don’t neglect the human capital “paid” to bloggers by becoming popular via the blogosphere. The econ bloggers from GMU (esp. Tyler Cowen @ MR) comes to mind. His career has probably been advanced significantly because of the popularity of his blog and so the zero cost may be well worth his while (and maybe he makes money off the ad revenue stream).
August 16, 2009 at 6:22 pm
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August 17, 2009 at 6:16 pm
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August 24, 2009 at 2:43 am
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August 26, 2009 at 1:20 pm
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