A music video is an information good a product that is essentially a bundle of information. Most of the cost of producing an information good results from collecting the information and making a first copy. Once the information is organized and digitized, the marginal cost of reproduction is tiny. In other words, an information good has large first-copy cost, and a tiny marginal cost. For a music video, the first-copy cost is the cost of putting images and sounds into a digital format. The typical music video has a first-copy cost of $223,000 an amount that includes $28,000 for the people responsible for the script or treatment, $81,000 for two days of filming, $81,000 for editing, and $33,000 for other costs. Once the images and sounds are digitized, the marginal cost of making additional copies is small, or in the case of a music video distributed online, actually zero. The average cost of a music video depends on how many copies are distributed. Suppose the music video can be distributed online, at zero marginal cost. The average cost is $223 if 1,000 copies are distributed, and drops to $0.23 if one million copies are distributed. In Figure, the average-cost curve is negatively sloped and gets closer

and closer to the horizontal axis as the quantity distributed increases. The gap decreases as the fixed production cost is spread over a larger number of copies. If consumers can download the music video at a price of $1, the break-even quantity is 223,000 copiesdistributed.

Transcribed Image Text:

$44.60 $22.30 Average cost (AC) 0 5 10 50 Quantity of music videos distributed (thousand)