Erik Brynjolfsson, Avi Gannamaneni, and Felix Eggers have a paper on the topic. From the abstract:
We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity.
Pointer from Tyler Cowen.
Based on their powerpoint, I gather that the method is something like this.
1. Ask a user of, say, Facebook how much they would need to be paid to give it up for a month.
2. If they say they would give it up for $25, tell them to do it.
3. If after a month they have not used it, give them $25.
The methods that they use are really interesting, but I have doubts about the approach. I think dollars are too abstract. I would like to see a lot of “give up X or give up Y” choices offered. The authors do some of this and apparently it confirms their findings.
The values that the authors get are really high. If the median Facebook user gets over $40 a month in value from it, then Facebook is leaving a fortune on the table by not having a subscription service. Yes, they have to be careful that charging a subscription price could drive some customers away, lowering the value of the service to other customers, but the “freemium” model could be used to address that. That is, let anyone join for free, but give more privileges to subscribers.
Finally, note that if I pay less for Google Maps and other digital services than I would be willing to pay, I also pay more for my smart phone, home Internet connection, and wireless service provider than I would if all I were getting were just plain phone service. In other words, some of the “consumer’s surplus” from digital goods goes to Verizon and Apple as revenue, not to consumers.
These e-commerce arrangements in which individuals barter personal information for electronic services avoid just not sales and local taxes but also represent a significant potential source of federal tax revenue. E-commerce transactions like Facebook and Twitter accounts would make an excellent field in which the US could explore introducing value-added taxation.
ISPs probably capture some of the surplus, but I’m guessing there is still a lot that goes to consumers due to competition. As a data point, I’ve been in several situations in foreign and remote locations where internet connectivity was available only in low quality and for inflated prices. Nevertheless, most folks ponied up for it without much grumbling.
I think the typical ISP technique used to try and claw some of this surplus back is to gradually raise rates, portraying average rates as “promotional” for some contract period, which makes later price rises feel more “normal”.
They are able to rely on market power in locations without many broadband alternatives, and also on consumer inertia, switching costs, and “confrontation aversion”. Some consumers will push back and mean in, and suddenly the ISP will offer a return to the old “promotional” rates, before trying to raise them again after a year or two.
It’s an interesting way to achieve price discrimination over time, though somewhat imperfect since not as well correlated with individual consumer surplus.
The big unknown. If fees work, then they should segment the market. Suppliers adjust the theme and the ads come with buyer’s discounts, we get buy’s club effect, I think.
The fee for service absolutely fails with a fixed fee rate, churn costs kill the thing. The buyer needs an element of price competition on a smaller scale, churn fees stop liquidity.
Ad blocker is popular, make ad blocker a run time fee for service. Buy, on the spot with a click, and current settlement prices posted. Make it part of the browser.
I’m frankly very skeptical of this. I don’t think very many people would be willing to pay $40 a month for Facebook.
I agree, but not so much because the consumer surplus isn’t there, but because they could keep the consumer surplus by switching to another free service (one that their similarly price-sensitive friends would simultaneously be switching to — making the switch more attractive)
The people willing to pay to be rid of ads are also the people advertisers will pay to reach, so if you allow people to buy their way out of ads then your advertising revenue will drop to ~zero. This is why, e.g., the Atlantic found that they still had to run ads to subscribers.
Unless you can get really clever with price discrimination, high prices will sink your network effects — at worst you get “facebook but you can only connect with people who value facebook at least as much as you do.” I still think this is the right future business model, but I don’t think we have seen the pricing structure or price point that will do it. My suspicion is $50/mo is the low end of the price range.
(On the other hand, then I will no longer have to explain to annoyed IRL acquaintances and relatives why I am not on facebook reading and appreciatively commenting about their infants, kittens, and politicians).
“Yes, they have to be careful that charging a subscription price could drive some customers away”
I think the risk isn’t that a subscription price would drive some customers away. It’s that a subscription might trigger an exodus that, once underway, could not be stopped. Already, Facebook is facing the problem of losing younger users:
https://www.usatoday.com/story/tech/2018/02/12/facebook-losing-young-users-even-faster-snapchat-emarketer-says/323765002/
These younger users are the most price sensitive, the most likely to chase after the cool new thing (especially one that old people don’t use), and as new users of social media, are least likely to be locked in. Facebook is already looking vulnerable and trying to charge a subscription would make things worse.
I don’t like the methodological approach.
There’s an asymmetry between what people would be willing to pay and willing to receive (loss aversion, budget constraints).
Then there’s the relative length of time and total cost. To be given $40 for giving up Facebook for a single month as a social experiment and then going back to business as usual, is a very different proposition than suddenly being told Facebook now costs $40/month forever.
I have mixed feelings about social media in general so, in my case, if Facebook came with any positive price I’d probably use that as a good reason to ditch it.
I also don’t like the presumption that this $40/mo is a good measure of consumer well being. There is surely consumer surplus, but my sense is that there is also social harm (lower attention spans, wasted time due to social media addiction, etc). The alcoholic has a high dollar value of consumer surplus, but the impact of alcohol on his well being is objectively negative.
They would have to pay me that to use it.