• 04 Aug 2006
  • What Do You Think?

What Happens When the Economics of Scarcity Meets the Economics of Abundance?

 
 
The "Long Tail," a term coined by Chris Anderson—and the title of his new book—describes the item popularity curve. Does the Long Tail represent a paradigm shift for business and consumer behavior? What are its implications for management going forward? Key concepts include:
  • Chris Anderson first coined the term "the Long Tail" in Wired magazine.
  • In a long-tail world, everything digital is available at all times.
  • Anderson describes three conditions critical to potential long-tail profits, all of which are provided by the Internet combined with creative new software and hardware.
 
 
by James Heskett

Summing Up

There's no need to rethink important economic constructs just because of the growth of the Long Tail phenomenon and its impact on demand and supply. Or is there?

That was part of the debate that occupied respondents to this month's column. As El Hakeem Yesufu put it, "The economics of scarcity has not been repealed by the digital Long Tail … prices are set by demand, not the constraints of supply." Edward Hare opened an aspect of the debate that several commented on when he said, "The rules of economics have not been repealed by digitization…. It occurs to me that 'costs' are being shifted … nothing is free. We're just not looking at 'cost' properly in this new world."

Along with shifts in costs, several commented about the new sources of scarcity in the world of the Long Tail. But there was disagreement about where they might arise. For example, Yeom Tae Seon commented, "The cost of creation is increasing in every creative area…." Len Bullard wrote, "As Yeom Tae Seon points out, scarcity based on digital format is only one domain. The other is scarcity of ideas and talent." In Gerald Nanninga's words, "… the economics shift in terms of where value is added in the supply chain…. The value … is created through the service of helping customers find what they want within the sea of choice…. It is ironic that the Internet, which is supposedly the key driver of infinite choice, tends to have near-monopolies for the portals to more efficiently reach any type of 'Long Tail' content." But even with increased ease of access, others pointed to added sources of scarcity. Soura Bhattacharyya commented, "… there is no such thing [as a free lunch]. Scarcity of time on the part of the consumer is the ultimate limiting factor even if we remove physical constraints of shelf space and supply chains." Andrei Iordache agreed, writing, "… there will always be at least one element in the economic equation that will be marked by scarcity…. Despite consumers' ability to find and access content in constantly simpler ways, do they have more time to experience this content?"

What does this bode for the future of economic theory and management education? Paula Thornton offered this opinion: "If there were to be a new discipline, it would be one that more closely embraces both psychology and economics as a means to understand human behavior and finds ways to accommodate and direct such behaviors." Citing the works of Ronald Coase, David Touve opined, "It would seem that economics has grappled with the question of markets for non-scarce products for some time…. The implication for management education would seem to be … [the need] to consider how … freely available … assets might support and increase the value of those nondurable, non-replicable assets a company might possess."

Mark Hammer's comment should provoke further discussion about the economic significance of the Long Tail phenomenon: "If Long Tail economics means embracing flawed principles that 'money is to be made by avoiding inventory, producing to order, and letting customers do the work,' most old-school marketers will be very pleased to take the Long Tail enthusiasts' lunch money in the real world…." What do you think?

Original Article

An entire generation brought up to regard many things in life—including communication and most intellectual property—as limitless and free is coming of age. They will join generations of their elders who studied college courses on the economics of scarcity and believe that "there is no such thing as a free lunch."

The new generation of twenty-somethings lives in what Chris Anderson terms "the Long Tail," a term he coined in his Wired magazine column and that is the title of his new book. The "Long Tail" describes the region of the item "popularity curve" comprising the vast population of least-popular items, whether it is song titles, books, or little-known brands. Life in the Long Tail is a busy routine involving the downloading of anything digital from the Internet; paying for some things, such as iTunes, but sharing and trading many others; creating and maintaining blogs, some of which are more frequently visited today than network television shows; contributing and editing items on the ever-changing open-network encyclopedia, Wikipedia; and when watching television (rarely), doing it when and where it is convenient to do so, through such devices as TiVo and cell phones. It is a world where everything digital is available at all times. And because of the very low cost of maintaining and distributing inventory, everything is likely to remain available forever, enabling the occasional gem of intellectual property to survive "in print" or in circulation. It is a world of non-zero-sum thinking.

This is in stark contrast to many of the rest of us who actually read newspapers, watch television, go to the movies, and use the Internet for such mundane purposes as sending and receiving e-mail and making purchases of merchandise generally thought to be in what Anderson calls "the Short Head" of the item popularity curve. The Short Head accommodates hit recordings, the most popular fashions, best-selling books, and other products of a world taught to believe in the economics of scarcity based on a limited amount of retail shelf space, a limited number of television channels, and generally limited resources of all kinds—in short, zero-sum thinking.

Just what are the economics of "the Long Tail"? If so much is free, can money be made there? Because if there is no money to be made, many would regard this as a quaint set of beliefs held by people about to come face-to-face with the real world. Anderson describes three conditions critical to potential long-tail profits, all of which are provided by the Internet combined with creative new software and hardware: drastically reduced costs of creation, increased ease of distribution, and search devices employing "filters" and user recommendations that make all of what is available accessible and understandable to potential consumers. In Anderson's view, all of these drive demand down into the tail, which he terms "a culture unfiltered by economic scarcity." In the Long Tail, money is made by such things as avoiding inventory, producing to order, letting customers do the work, pricing creatively and flexibly to various customers, utilizing a variety of distribution methods, sharing information, trusting the market to do your job, and understanding the "power of free" combined with money-making services or products.

Does the Long Tail represent what some would call a "paradigm shift"? Who will the Long Tail benefit most: consumers, producers, or intermediaries? Is it limited to things that can be digitized, thereby excluding most products for which inventory carrying and other logistics costs for unpopular items are prohibitive? Does it warrant an entirely new field of economics scholarship? What are its implications for management education? What do you think?