Internet Economics Essay Example

still requires a value exchange. By consuming the free content, you contribute to enhancing the reputation of the content creator, which can lead to better job opportunities, networking advantages, or a larger customer base. While reputation credits may occasionally be converted into monetary compensation, the specific outcome varies on each occasion and is uncertain. Cross-subsidies can take various forms; one example is when paid products subsidize free offerings. Loss leaders are commonly used in promotions where items like popcorn subsidize non-profit generating movies or expensive wine is given away completely or sold at significantly reduced prices compared to its original cost. These promotions often include phrases such as "free gift inside" or offer free samples.This economic model has been utilized for centuries, involving the provision of free products or services in exchange for payment at a later time. For instance, one example is when a cell phone company offers a free phone with a two-year subscription contract. This illustrates how the revenue stream is shifted from the point of sale to an ongoing unity, where your future self effectively subsidizes your present self. The carrier's hope is that you will be enticed by the appeal of receiving a free phone immediately rather than considering the annual cost of the phone service. Such pricing strategies are commonly employed and can be observed in various scenarios, such as men paying to enter nightclubs while women receive free admission, "kids get in free" promotions, and progressive taxation where wealthier individuals contribute more towards reducing costs for those who are less affluent or exempting them entirely. E takes this concept to an extreme by targeting a specific group of

consumers who receive a product or service at no charge. The intention behind this approach is that these free consumers will attract paying customers or some portion of them will convert into paying customers. In Las Vegas attractions, visitors can enjoy impressive interiors without any cost due to this concept. The owners anticipate that some individuals will opt to gamble or shop (ideally both) as a resultThere are four main types of free models available within cross-subsidies. The first type is FREE 1: DIRECT CROSS-SUBSIDIES, where a company offers a product for free to encourage customers to eventually pay for something else. An example of this approach is Wall-Mart, which offers buy-one-get-one-free deals on DVDs as a loss leader. This attracts customers and allows them to profit from other sales.

Many industries, including banking and mobile calling plans, use this strategy. Cell phone companies keep monthly fees low to influence customers' decision-making process while making profit from other fees such as the monthly voice mail fee. By strategically pricing certain products close to zero or at no cost, companies make their more profitable products more appealing.

Technology has expanded companies' options in defining their markets and using free products or services as promotional tools. For instance, Urinary has disrupted its industry by positioning itself as a comprehensive travel agency rather than just an airline seat seller. Similarly, banks offer credit cards for free because they earn money from the service fee charged by retailers when purchases are made using the card. If you don't pay your bill in full, the bank makes money from interest charges passed on to you by the retailers.

The concept of "free" applies

to various aspects such as content, services, software, etc. In the media industry, a system involving three parties has emerged.
The exchange in which the first two parties participate, with a third party paying to be involved, is a common model observed in the media industry. Publishers offer products for free or at low costs to consumers, while advertisers pay to advertise alongside them. This approach has been adopted by media platforms like radio, television, newspapers, and magazines instead of directly selling their publications to readers. The internet has further expanded this business model across various industries that rely on advertising as a means of covering costs. Media companies generate revenue through methods such as selling consumer information, brand licensing, subscriptions, and direct e-commerce. As these models gain popularity, there is now a growing ecosystem of web companies operating on what are known as "two-sided markets." These models involve two distinct user groups that mutually support each other. Advertisers play a crucial role in these models by paying for media reach while indirectly receiving support from consumers who contribute towards increased product prices aimed at covering marketing expenses. Consequently, merchants experience higher spending levels and issuing banks face elevated fees. To give consumers the impression that primary goods are free, the costs associated with these models are often distributed or hidden enough.The "Premium" model is a prevalent online business model where basic users have access to free features or content that can be upgraded to a paid version with additional features. Fred Wilson popularized this concept, which is similar to the traditional free sample model but with a significant difference. In the Premium model, for every

user who pays for the premium version, nineteen others receive the basic free version at negligible costs. The Web has turned sharing into an industry where individuals' actions can have a global impact through various forms like gift economy. Sharing may seem like unfair competition from a monetary perspective, but it's more about how we measure value rather than the worth of what is being created. Reasons for sharing can vary from reputation to self-interest and can occur both intentionally and unintentionally, such as providing information on a public website or indirectly supporting someone through aluminum can donations.One example of unintended sharing involves solving Captchas to access free pornography. This benefits spammers who view it as a black box process without understanding the effort required for decoding the text from another site. This principle also applies to actions like rating stories on Dig, voting on Yahoo Answers, or using Google's 411 service.

Every time you search on Google, you contribute to enhancing the company's ad-targeting algorithms. Each use of their service adds value by improving the service itself or generating useful information elsewhere. It's important to recognize that while these services are free for users, they come at the cost of your labor.

Piracy in monetary markets perfectly illustrates this concept, particularly with online music. The distribution of music has become nearly costless due to digital reproduction and peer-to-peer sharing. Consequently, regardless of whether a business model is in place or not, the product becomes freely available. This economic force is so powerful that it renders laws ineffective and undermines copy protection measures imposed by labels.

Other attempts to combat piracy through alternative revenue streams like concerts and

merchandise licensing have also proven unsuccessful in preventing it. However, some musicians acknowledge that their music does not generate monetary profit but create it for reasons such as enjoyment and self-expression—something that has always been true for most musicians.To examine this perspective, let's consider examples of free experiences in everyday life. While browsing a newsstand, I encountered a Real Simple magazine cover titled "36 Surprising Things You Can Get for Free." This is a common occurrence on newsstands, making it a representative sample to evaluate the application of this viewpoint.

Now let's analyze how Real Simple distributed the first half of their examples. The text below emphasizes that some mentioned examples incorporate elements from multiple models, while others involve competitors utilizing different categories of models. For instance, 1-800-freezer's impetigo and Google 411 are instances of non ad-supported models. Furthermore, government services fall into a distinct type of cross-subsidy since the relationship between taxes paid and received services is indirect and diffuse.

The following examples demonstrate various models:
- Free Example: Apple Store classes, Althea club trials, Baby music classes, Ben and Jerry's Free Cone Day.
- Free Model: Free 1: Simple cross-subsidy model.
In these cases, companies offer something for free with the hope that customers will make additional purchases. Online photo printing provides complimentary samples, while small business classes receive government funding supported by taxpayer money.BBC language classes fall under cross-subsidy for British individuals who pay taxes but can be seen as a gift economy for non-British individuals.Other examples of this concept include the popularity dialer for free excuse calls, Free reminder emails, Skippy for free phone calls (backed by communication companies), Scraggliest barter, and free 2: Ad-supported

model. The free 3: Premium model combines both free and paid versions, with the latter allowing connection to cell phones. Kids night on Broadway is upheld by parents, Openhearted offers no-cost classes, and Freelance platform provides free pets. In addition, there's the free 4: Monetary markets model where museums receive funding through grants or donations and Paperbacks.Com.

It's important to acknowledge that there may be exceptions and hybrids within this framework; nevertheless, it will prove beneficial in subsequent chapters.

This book primarily focuses on two prices - something and nothing. However, an additional price that cannot be disregarded is less than nothing which refers to being paid to utilize a product or service instead of paying for it. This concept is commonly observed online where companies like Microsoft compensate users for using their search engine. It has a long-standing tradition in conventional marketing, such as instant rebates, cash-back marketing, and rewards for using credit or loyalty cards. While consumers often perceive these incentives as free money, few actually result in receiving less than nothing.This perception can lead to different psychological reactions compared to simply saving money.Several studies have shown that consumers perceive cash-back rebates as a sudden windfall, akin to winning the lottery, even though it is essentially just a loan against future payments. In Dan Rallies' book Predictably Irrational, there is an example of negative pricing illustrated. Rallies conducted an experiment with his class at Mitt's Sloan School of Business by asking two different questions: whether they would pay $10 to hear him read poetry or if he should pay them $10 to listen. Afterward, all students were asked about their perceived prices for short, medium,

and long versions of the poem. The initial question served as an anchor and influenced their perception of fair pricing. Students who were asked to pay $10 offered an average of $1 for the short poem, $2 for the medium one, and $3 for the long reading. On the other hand, those who believed they should be paid demanded $1.30 for the short reading, $2.0 for the medium one, and $4.80 for the long reading.

The concept of compensating individuals for tasks they typically expect payment for is exemplified in Mark Twain's story of Tom Sawyer convincing his peers to paint a fence while also paying them.This instructive tale highlights how this approach can lead to negative outcomes.Twain also draws attention to a similar situation involving wealthy English gentlemen who willingly travel long distances in their four-horse passenger-coaches without accepting payment.

They perceive receiving payment as transforming their enjoyable activity into laborious work. These examples showcase what Derek Severs, founder of CD Baby, refers to as "reversible business models." In Los Angeles music clubs, bands are charged to perform instead of being paid in the traditional manner. Nonetheless, bands view the exposure gained from performing as more valuable than immediate monetary gains and consider it a stepping stone towards more lucrative opportunities. In China, certain doctors receive a monthly salary based on the health condition of their patients. If a patient falls ill, the doctor is held accountable and no payment is required for that particular month. The objective of these doctors is to maintain and enhance their patients' well-being in order to ensure they receive their monthly compensation. Denmark offers a gym membership program where

participants are exempt from paying as long as they attend at least once a week. However, if they fail to meet the requirement of regular attendance, full-month fees will be reinstated. The underlying psychology behind these unconventional business models is truly ingenious. Despite the fantastic feeling derived from going to the gym every week, a busy schedule may eventually cause one to miss a week. In such cases, individuals themselves are responsible for not attending regularly and must pay for the missed session. However, rather than canceling their membership like usual in such situations, people's natural response is actually to increase their commitment levels.
Preadolescences.Com generates income from phone companies instead of clients by utilizing the information regarding the specific phone company used by every individual who reaches out to them.