Wednesday, April 29, 2015

Abundance economics


Economics has always been about scarcity. In fact, the most widespread definition of the economic science is precisely the management of scarce resources, whether it is at a society level or within a business activity. This definition is as correct today as it ever was. However, the relevance of scarcity is declining, at least in those matters concerning the use of new information and communication technologies.

This posts explores the concept of abundance economics in detail. Beware! We will encounter some microeconomics along the way, but I will try to keep it simple!

Network effect in abundance economics

Traditional broadcast media are scarcity-driven businesses. Since the number of channels is physically limited, broadcasters have to be extremely discriminating about what gets out, releasing only those contents that are likely to appeal a wide range of the population. Every season, television channels everywhere debate on what pilot to pick up as a series because, given scarce resources, they cannot show them all. Broadcasting a show that only produces small audiences has the opportunity cost of broadcasting another show that may appeal to a larger audience.

Today, opportunity costs are lower. In 2008, Televisión Española broadcast a national series called ‘Guante Blanco’. The show failed to retain the expected audience and was cancelled after a few episodes. ‘Guante Blanco’ was already filmed and produced so no production costs were cut by changing the schedule listing, but if a more popular alternative were to be found, Televisión Española could attract a higher audience and, therefore, obtain higher revenues from advertising. If Televisión Española had infinite channels, or days were longer, the decision might have been to push the show to a more specialized channel or to another time frame. Such options were not available, but later Televisión Española announced that the remaining episodes would be uploaded to their website where fans of the series could enjoy them for free. Given the small size of the audience for ‘Guante Blanco’, Televisión Española found that the opportunity cost of regular broadcasting was too high. However, the Internet allowed Televisión Española to rip some advertisement revenues on that same program that was not working well on traditional television.

The opposite happened with Canadian science-fiction series ‘Sanctuary’. The show was released on the Internet in 2007 for free. Given the success of the show, channel SyFy moved the following seasons to their regular broadcasting schedule. In January 2011, the show was picked for a fourth season. By lowering opportunity costs, the Internet created enough incentives for SyFy to develop a television show that was considered too risky for traditional television. This is the mechanism through which the Internet encourages innovation, by reducing the risk of investments.

In abundance economics, rare products are not more valuable, as in the case of precious metals. Abundance economics produces what we call ‘network effects’ (also known as network externalities or demand-side economies of scale): as the number of users of a good or a service increases, the more valuable that good or service becomes. For example, social networks like Facebook become more valuable as the number of users increases because they become more useful and entertaining as the number of people one can interact with increases.

Tweet this! Abundance economics produces network effects: the more users, more valuable that good or service becomes

In the case of network goods, marginal utility (Um) for consumer i increases as the number of other users (xj) increases –or, in continuation of our example, as new members join Facebook.

Marginal utility of the new media

The figure above presents a concave shape: the higher the number of users is, the higher the marginal utility –the change in total utility when an extra user is added- becomes. This curve could become convex at certain point if the number of users increases to a point of saturation in which the addition of new users produces lower utilities. For example, although the marginal utility of social networks such as Facebook is generally upward sloping, after the number of users has exceeded certain amount, the utility produced by the addition of new users will be proportionately lower, but not negative because the addition of new members does not worsen consumer i’s total utility (shown in the figure below).

Marginal utility of the new media in the case of saturation

Notice that marginal utility is positive as soon as xj is larger than zero. This is because we have defined xj as other users, that is, other than user i. This means that new media start yielding utility as soon as there are two users, user i and any other (j).

On the other hand, consumers of new media respond to price changes exactly as any other rational consumer would: the higher the price of a service is, the lower the purchased quantity will be.

Taking all of the above into account, we obtain a demand that depends negatively on price and positively on the number of users; as expressed in the following equations:


mat1a mat1b mat1c

On the supply side, because of economics of scale, average costs in the long-run are decreasing, amounting to a downward sloping supply curve. Figure 3.3 shows demand and supply as functions of the consumption of user i. Equilibrium is reached where the supply and demand curves cross.

Demand and supply curves for the new media

By keeping px constant, we can see how the demand curve reacts to changes in xj (In equation 3.4 we express that px is constant with a line).


In the last decade, the new media industry has experienced an increase in the number of users. Keeping prices constant, the next figure shows how an increase in the number of users shifts the demand curve outwards, from D to D’, because one will increase his demand of a new media service as others do so. This figure shows how the shift in the demand curve results in a new equilibrium of lower prices and higher consumption.

Outwards shift in the demand curve decrease prices

The figure above assumes that supply has remained constant. In reality technological improvements have allowed higher outputs for given prices, which has shifted the supply curve outwards, pressuring prices to increase. However, new media markets have are characterized by their decreasing prices. The figure below shows that this is possible as long as the demand’s curve shift is larger than that of the supply curve.

Decreasing prices in new media industries

These economic changes brought by the use of ICTs have resulted in a new layout of imperfect information. In new media markets, information consumers do not always know everything about all products, neither do all of them know the same, and access to information is not costless. However, the cost of obtaining information is close to zero, and the Internet together with third generation cell phones can supply all necessary information needed to make a purchase instantly. New ICTs have pushed all markets a little closer to perfect information and, in the case of the media markets, they have turned a scenario of scarce information and abundant attention into one of abundant information and scarce attention. Today, media businesses face a market where consumers can choose from a wide range of differentiated products, which makes it difficult for a firm to capture and retain sizeable audiences.'
Manu Panizo is an Analytics and Digital Business consultant who works at Accenture Interactive’s Madrid office. Specialized in web analytics, with a master’s degree in Digital Marketing and a background in finance.
    May 12, 2015

    It’s amazing how our lives have changed over the past 30 years due to technological advances and how the media sector has acquired a tremendous importance on our societies. And this also applies to economics: ICTs bring new perspectives on what a good is, new opportunities but also new challenges. Economists have to bear all this in mind and be prepared to find innovative solutions that take the most of the new opportunities ICTs are bringing. Very interesting article.

    Manu Panizo
    May 12, 2015

    Yes, and more changes are coming. Old models stop working and new ones have to be figured out. Economists, business men and public servants have to adapt their mindset from scarcity to a mix of scarcity and abundance.

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