Reconsidering the Value of Free Digital Services

How much would it take for consumers to give up web access? New MIT research conducted online experiments to put a price on digital value

By Irving Wladawsky-Berger

Gross domestic product (GDP) is the basic measure of a country’s overall economic output, based on the market value of all the goods and services the country produces. Most measures of economic performance used by government officials to inform their policies and decisions are based on GDP figures. But, have long been raised about the adequacy of GDP-based measurements given the major changes that have taken place in economies around the world over the past several decades.

GDP is essentially a measure of production . While suitable when economies were dominated by the production of physical goods,

GDP does not adequately capture the growing share of services and increasingly complex solutions that characterize advanced economies. Nor does it reflect important economic activity beyond production, such as income, consumption and living standards.

The Limits of GDP

In 2008, a Commission on the Measurement of Economic Performance and Social Progress led by Nobel-prize winning economists Joseph Stiglitz and Amartya Sen was to look at the limits of GDP as an indicator of economic performance and progress.”What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.” noted its report . The Commission recommended complementing classical measures of GDP and economic production with additional measurements that captured people’s well being, as well as factoring in measurements to help reflect the evolution of the economy into the future.

Over the past decade, a new set of concerns have arisen with the rise of the Internet-based digital economy. How do you measure the value of the increasing amounts of free information goods available over the Internet, including Wikipedia articles, Google maps, Facebook interactions, smartphone apps and You Tube videos?

In Why it Matters that the GDP Ignores Free Goods , a talk delivered at the 2012 conference, MIT professor Erik Brynjolfsson said that despite being in the midst of a major technology revolution, official government statistics don’t include the value of digital goods and you could thus conclude that the information sector has barely grown since the 1960s — still at roughly 4.5% of the economy. How is this possible when we are spending more and more of our time consuming and developing digital goods than ever before?

“Obviously, there’s some major measurement problems in the way we keep our statistics, and that’s a real problem because, as the saying goes, you can’t manage what you don’t measure,” he said, and mentioned a few of the problems in measuring the value of digital goods. The first is that the marginal cost of delivering them over the Internet is pretty close to zero. While in some cases their economic model is based on advertising, in many cases users contribute their time, and develop digital content for nothing. Online information may be updated every minute of the day and accessible almost anywhere in the world, but its price is usually radically lower than that of its physical counterpart — if there even is a price.

The problem is that GDP measures the total amount spent on these goods and services. If the price is zero, then “zero times any quantity is still zero. So you could have an enormous of explosion of bits or articles or whatever else. If they’re priced at zero, the statisticians in Washington do the math and, lo and behold, it comes out as a big fat zero contribution for our GDP.” Traditional metrics have not been adequate for the information economy because so much of the digital economy has been free.

How can you measure the value of goods whose value is essentially zero? A recent research paper by Brynjolfsson, Avinash Collis and Felix Eggers introduced a novel method for measuring the value of digital goods to consumers using online choice experiments. (See our related post on the research, here.)

Their proposal is based on measuring the consumer surplus of a digital good — loosely defined as the difference between the amount consumers would be willing to pay and the actual price they do pay. In principle, measuring consumer surplus provides a direct measure of the value of the digital good.

Giving Up E-Goods: What Price?

In practice, consumer surplus is difficult to quantify. To do so, the authors used three different large-scale online surveys, covering 65,000 people, to measure a consumer’s willingness to accept monetary compensation for losing access to various kinds of digital goods for a certain time period. The difference between the price consumers were willing to accept, and the actual price of the digital good— in many cases zero— was then used to calculate the consumer surplus of the digital good, that is, the value of the good to the consumers.

The researchers conducted a series of surveys. In one in particular, they identified the most widely used online applications and websites on various devices and aggregated them into eight different digital categories: email, search engines, maps, e-commerce, video, music, social media, and instant messaging. The survey then quantified the value of each of these digital categories by ascertaining how much money would be required for a consumer to give it up altogether for one year. Each survey participant was given a choice of various price levels for each category.

The survey was run twice, first in 2016 and again in 2017. The 2017 results were somewhat higher, but otherwise they were both fairly similar.

Here are the 2017 median amounts that it would take to compensate a consumer to give up access to each of the digital categories for one year:

• Search engines — $17,530
• Email — $8,414
• Maps — $3,648
• Video — $1,173
• E-commerce — $842
• Social media — $322
• Music — $168
• Messaging — $155

Search engines and e-mail were the two most valuable categories, in all likelihood, because for many people these digital services are essential to their jobs, compared with entertainment or personal use categories which they deemed less essential.

The data show that the digital economy is contributing more consumer value than we’ve realized, especially when you consider that 15 years ago many of these digital services didn’t exist or where in their infancy. Now, they’re tightly integrated into our work and personal lives.

In its conclusions, the paper warns that these are early results. Much more research is needed to better understand how to measure the value of widely used free or near-free digital goods, to get a more realistic view of what creates value in our increasingly digital economy. “A major limitation of our study remains the relative lack of precision in our estimates. Compared with GDP, we are only able to provide a relatively coarse estimate of changes in consumer surplus given our sample size… Future work should use more massive sample sizes… Another limitation of our study is that it is biased toward people using the internet. The choice experiments are only accessible online, and therefore people not using the internet at all [around 11% of the U.S. population] are excluded.”

“Despite their limitations, the choice experiments we conduct are at least attempting to directly measure a concept that we know is not correctly measured by other official data. In short, we believe it is better to be approximately correct than precisely wrong.”

Originally published at https://blog.irvingwb.com.