Cost Disease or Fixed Eyeballs

Netopia contributor Ralf Grötker writes about William Baumol’s cost disease theory this week. I find this thought fascinating, but have some objections. First of all, it seems to be a cost-oriented approach to pricing, but you could argue that the right price of a good or service is what the customer wants to pay, not how much it costs to produce. That is the logic of the classic supply/demand price graphs. In Grötker’s piece, this is best illustrated by the ice-cream vendors who managed to make more money relative to productivity increase thanks to new flavours and fancy names (maybe it tastes better too). By the same thinking, the answer should be to make the good or service more exclusive/less accessible if you want to keep the price tag up. However, that is hardly a good plan for things like healthcare and universities – labour intensive public functions.

At a recent seminar in Brussels, I asked Tony Clayton – Chief of the UK Intellectual Property office – about cost disease. Clayton dismissed Baumol’s case with the string quartet, arguing that it too can have productivity increase by recording their music and selling it, or broadcasting their shows to a larger audience. That is similar to how the media has developed with newspapers’ web TV for example. More output, smaller staff. But also more competition for a relatively fixed amount of eyeballs, so the irony is that not only does cost disease make journalism relatively more expensive, but increased supply also drives the price of content down. That is a double negative for the news media, and by no means a problem that is limited to that industry.