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Originally Posted by Boldrin&Levine
We can also estimate the willingness to pay for earlier delivery through the examination of express delivery charges.On October 1, 2002, Amazon.com, for example, charged $0.99 per book delivered in three to seven days, $1.99 per book delivered in two days, and $2.99 per book delivered in one day.
So, some consumers at least are willing to pay $1 extra to have a book delivered twenty-four hours sooner. This is obviously a substantial first-mover advantage.
Indeed, for books, we do find that up-front profits are typically the most important. Eric Flint reports that the “standard experience is that 80% of a book’s sales happens in the first three months.”13
Our own data on a much broader base of fiction novels shows a decrease in sales over the initial four months of roughly a factor of six.14 The book industry, at least for paperback novels, is an industry in which the cost of creation is relatively small. Flint reports that the “average paperback sells, traditionally, about 15,000 copies” which, with a royalty of $2 per copy, would work out to about $30,000, also consistent with our broader database.
Intellectual property supporters, such as Jack Valenti, former head of the MPAA, become extremely agitated about the fact that many innovations are risky. After all, it is bad enough that competitors should be allowed to “steal” “your” creation. But if the original project is risky, they will only choose to “steal” if you are successful: few illegal copies of such great flops as the 1987 Ishtar are widely distributed on the Internet. We have already mentioned elsewhere that such an argument makes little practical sense: there is only one way in which one can tell for sure if a movie or a book is a great success or a flop, and that always comes after the fact. If something is labeled a “great success,” it means has sold lots of copies already, thereby allowing its original creator to make lots of money. That an imitator comes in after the fact to grab a few crumbs from the floor cannot make much of a difference.
In any case, it remains true that when a new product is launched it is with a high degree of uncertainty as to its actual market performances. What implication does the existence of uncertainty have for competition in the ideas sector? Does it make a difference that some ideas are revealed not to have any or little market value after the initial investment has already taken place, while others are hugely successful? It does not; it simply changes the algebra of computing profits.
In short, the uncertainty surrounding the success of an innovation changes the specific calculations of how likely it is to take place; this is true with or without intellectual monopoly. But the basic theory of competitive innovation does not change on account of uncertainty – an uncertain outcome is equivalent to earning a lower rent or to having a higher cost. (p.144-5)
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