Hazlett: Pricing 'free' New Economy goods

Tom Hazlett discusses "Pricing 'free' New Economy goods." Excerpt:

Satellite operators compete by offering more - and better - programmes at higher prices, and cable incumbents have been forced to respond in kind, upgrading content (including clearer pictures on digital tiers). While cable’s inflation-adjusted rates rise, consumers believe they get more value per dollar.

Nonetheless, the menace of outrageous cable rate rises screams out to policymakers. Hearings are held, cable company executives bashed, headlines written. Yet what can be done? Rate controls flunked the market test in 1992-94, when subscription fees were slashed about 10 per cent by regulators, only to see cable programming (i.e. service quality) deteriorate so dramatically that subscriber growth declined - revealing that consumers were fleeing from the "consumer protection".

So, a new plan. Senator John McCain (R-AZ) and others want to force cable systems to price networks à la carte, giving subscribers the option to select, say, the History Channel, Toon,TNT and CourtTV while passing on TBS, Lifetime and C-SPAN1. If you only pay for channels you actually want to watch, you will save lots of money.

Guess again. Because à la carte pricing prompts the operator to re-price, the customer’s quality-adjusted rate is likely to rise. ...

Information goods are tricky. The first unit often costs oodles to create, while the next billion units are free. So with video, where cost-based pricing becomes moot, and capitalists conjure ways to push their products out to mass audiences. That is a good thing. So is the competition with satellite TV, forcing cable monopolists to pump up quality. The political reaction to the illusion of higher prices offers to help customers by taking away channels. That is a bad thing. A la carte? Au contraire - prix fixe for the all-you-can-eat buffet, garçon.