TCS Daily


More Equal Than Others

By James D. Miller - August 7, 2003 12:00 AM

Wealth has lost some of its privileges. If Bill Gates and I caught the same disease, he could afford better doctors than I. We would both, however, probably use the same pharmaceuticals to treat our condition. While Gates could buy one of those big screen plasma TVs that are still a bit too expensive for me, I can afford to watch the same movies as he sees. Wealth might buy happiness, but in today's economy it often doesn't get you better stuff.

 

The wealthy do, of course, own nicer cars than the middle class. After General Motors manufactures a luxury car for the affluent, it's still cheaper for them to make an economy car for the rest of us. If a firm can easily copy a product, however, then once it sells its goods to the rich, it costs the company little to also sell it to the middle class. Since software is so easy to copy, after Microsoft has written, tested and partially debugged a "luxury" operating system it would actually cost it more to make an "economy" version for its less wealthy users. Consequently, while Americans drive different quality cars, we mostly use the same operating systems and word processing programs. The logic of capitalism dictates that firms sell the same easily replicated goods to almost everyone.

 

What is the easiest thing to copy: Information. Putting together those zeros and ones that form the basis of music, movies and software can be challenging. Once you have the formula down, however, making copies is trivial. As informational goods become more important to the economy, the consumption of the middle class and rich converge.

 

Consider two directors competing to create the next great action movie. The first plans on marketing his film all over the world, while the second director gears his movie exclusively for the cultural elite of Paris. The first director's planned worldwide sales will cause his backers to give him enough money to incorporate expensive special effects and top talent. The second director's limited future audience, however, will limit his budget. Consequently, even the Paris glitterati might end up preferring the mass-marketed film.

 

To create a great action movie you need a big budget. To afford a big budget you need to market your film to the entire world's upper and middle class. Consequently, the middle class sees the same movies as the rich.

 

Pharmaceutical companies as well as movie studios often need to mass market products. The essence of a life-saving drug is information. Pharmaceutical companies spend billions finding chemical formulas possessing useful medicinal properties. They can only recoup their research costs by selling the same formula to many. Furthermore, after a pharmaceutical company discovers such a formula, it's relatively inexpensive to make copies of the drug. Therefore, once a pharmaceutical company has sold a drug to the rich, it costs relatively little to sell the exact same product to the middle class.

 

Numerous other physical products besides pharmaceuticals are also primarily informational goods. For example, many computer chips are difficult to design but cheap to replicate. Chip companies, therefore, must often mass market their products to achieve profitability.

 

Currently, plasma TVs are still very expensive to make and are thus not yet primarily informational goods. Soon, however, companies will find manufacturing "formulas" allowing them to cheaply make plasma TVs. Plasma TVs will then become mass-marketed informational goods and not merely toys of the rich.

 

Liberals often complain about increasing income inequality in America. Money has value, however, only for what it can buy. As easily copied informational goods become more important to the U.S. economy, the differences in consumption between the rich and middle class will continue to diminish.

 

James D. Miller writes The Game Theorist column for TCS and is the author of Game Theory at Work.


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