Deadweight Loss

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"Deadweight Loss"

You hear a lot of bogus statistics thrown around about economic losses due to piracy, but you hear very little about the economic cost associated with pricing digital media so far above the marginal cost of production.

For example, I was in Target last week and saw this box set of The OC DVDs on sale for $116.99:

theoc.jpg

Now for my part, I was never a huge OC devoté but I watched most of the first season and some of the second season before losing interest. And I have some money, I like pop culture, and I like impulse buys, etc. If this box set were orders of magnitude cheaper—say $10.00 instead of $116.99—I might have bought it. Now presumably the people running these businesses know what they’re doing, and overall profits really would be lower. But still, owning all those episodes would have given me $10.00 of utility and it would be possible, though not legal, for me to acquire them at no cost whatsoever to their owner. And it seems that The OC lost over five million viewers between its popular first season and its unpopular forth season. Maybe all five million of us would be moderately interested in the box set worth of DVDs were it cheap. That’s maybe $50 million—maybe more—in deadweight losses related to just one show.

Now obviously that’s a lousy estimate. Don’t take it seriously. Maybe some clever economist somewhere will come up with a reasonable way of calculating it. I’m just illustrating the point that the costs are real. And that for this reason, the optimal amount of copying is not zero. It’s just common sense that there are lots of people for whom owning the complete run of a TV show would be worth more than $0 but more than the $100+ prices these things carry in stores. It’s a good thing, from a social point of view, that some of those people are able to acquire “pirated” copies of the things they want to watch.

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