Asymptotically Free Goods

"Arguing in My Spare Time," No. 5.06

by Arnold Kling

February 24, 2002

...Within 10 or 15 yearsí time, practically every computer and every handheld device will be online all the time. What many people donít realize, however, is that this visionary network is increasingly up and running today. And it doesnít even require any new technology, business models or significant investment...the real wireless Internet doesnít cost $50 a month--itís free. All thatís required, really, is openness.

--Simson Garfinkel, The Internet Amenity, Technology Review, March 2002

In the Internet era, many of the most bitter struggles over commerce and policy are being fought because of the potential to offer valuable goods and services for free.

Beyond these immediate cases loom several other issues of products and services where research and development costs are high, but the marginal cost of the final product or service is low.

As the cost of providing and distributing various types of goods and services is falling, some other costs remain high. For example, Garfinkel writes,

One of the most surprising things we learned from launching our Internet startup was that providing wireless Internet service is really cheap. What ended up bankrupting the company were all the ancillary services we had to develop--credit card billing, technical support, the corporate Web site and the various security measures we had to put in place to prevent unauthorized use of the network by nonsubscribers.

Garfinkel is suggesting that it costs more to maintain an infrastructure that allows you to charge for the service than it does to provide the service itself. If that is the case, then what these asymptotically free goods and services represent is nothing less than a breakdown in the economic system.

A Precise Definition

I want to try to offer a precise definition of an asymptotically free good. I believe it differs from other concepts that have been used by economists.

An asymptotically free good is a good where almost of all of the cost involved consists of research and development. It differs from a natural monopoly in two ways.

  1. In contrast with an amusement park or a utility, the cost of maintaining the capital for an asymptotically free good is relatively low. Once the research is complete and the idea is proven, the costs are trivial. In the absence of patent protection, there is nothing to stop a competititor from taking the idea and driving the price close to zero.

    For example, once you have undertaken the research to produce a new miracle drug, the marginal and average costs of producing it are low. To take another example, once devices have been designed and protocols established for a high-speed wireless network, the cost of providing and maintaining the equipment for a network may be low relative to the number of users.

  2. Asymptotically free goods are like public goods in that it is costly to exclude someone from enjoying the benefit of an asymptotically free good.

The Role of Government

Liberals consider the role of government in an environment with asymptotically free goods and see opportunities.

Conservatives consider the role of government in this environment and see threats.

Conclusion

Asymptotically free goods are a new economic force. Problems are being solved not by throwing capital and labor at them, but by undertaking research and development which, when completed, leads to solutions that cost relatively little in terms of traditional factors of production.

I would not want to own stock in a company that generates its revenue from music distribution on CD's and tapes, from phone service, from selling information retrieval services, or from traditional health care services. For these companies, the present value of future earnings has to be calculated under the assumption that at some point they will be crushed by the steamroller of asymptotically free goods.

Asymptotically free goods also raise issues of public policy that may exacerbate the polarization between liberals and conservatives. For those who tend to view government as an instrument of the public good whenever the free-market outcome may be flawed, asymptotically free goods provide an excuse for more government intervention. For those who tend to see government as providing an instrument by which status quo interests can impede change, asymptotically free goods are a reason for keeping government hands off.