[ disclaimer, I am an armchair economist ]

"You're talking about the supply side of the supply/demand equation. Essentially, the greater the supply of something, the lower the price one can charge for it. Reducing the cost of production effectively increases the supply, so it ultimately reduces the price as well."

No I am not. One of my areas of research has been the economics of information. Unlike classic 'real goods' economics which are driven by supply and demand, information economics are driven by other forces. One of the paradoxes this sorts out is how something can be 'free' to produce and still have economic value.

In the case of creative works, I theorize that the economic value derives from the creativity itself. One might pay to see a play rather than read it for free because the 'value' is watching the theater bring the work to life. Similarly with 'apps' in that you might pay for one that saves time, or automates a loathsome task, Etc. So the economic question becomes what does it cost to 'produce' (which is go from nothing to something) the work, vs what is the economic value of utilizing the work (aka the desire to have that problem solved). For some things, like Uber (which automates finding the nearest car available for hire) many people 'desire' to have that problem solved and it motivates them to give economic value to possess that capability. (or buy the app, subscribe to the service, etc).

So Parse lowers the cost of converting idea into App, which lowers the economic cost to develop an idea, does it have the same economic value to the recipient? Let me use an example that might illustrate what I'm trying to say.

Lets say you've got a neighbor with a rude dog which barks every time you walk out the front door. This is annoying. Now someone offers to fix it so that you don't have to deal with it, and their 'fix' is to put a giant tube down your front sidewalk so the dog can't see you leave. You might find no value at all in that solution because you could do the same thing and the giant tube looks stupid. Or the person might be some sort of dog whisperer type who could go over and train the dog to not respond like that when they see you. Well in the latter case there is a higher perceived economic value since you don't possess 'dog whisperer' skills and thus you could not implement the solution yourself. But the tube thing, well you could do that if you wanted too.

So back to Apps, what is the economic value of an app you really could create yourself in a 'couple of hours' ? Probably not a whole lot. But if it would take you 'weeks' to make that app, well you're willing to spend $4 to have someone else do the leg work.

Information economics are driven in part by a strange opportunity cost function which I can't say I've completely characterized, but I do know that if we released a tool tomorrow that let you speak to your phone and tell it the 'feature' you wanted it to have, and some sort of thing went out and created that and dropped it on your phone. It would destroy the app ecosystem as we know it today.

Perhaps Parse + Mechanical Turk + Siri can get to that point, if so it would really change things.

You've written a very elaborate reply that still fails to point out why astine's simpler explanation (i.e. standard supply-and-demand) doesn't apply. After all, other things being equal, at a fixed price there will more supply for service X as the cost of providing X decreases.

All digital goods have infinite supply and yet even for goods that can be acquired for free (say Ubuntu distributions), there are markets (the $10 starter DVD). Once a digital good is 'produced' replication costs and distribution costs approach zero, or at least to a marginal cost of zero given the sunk cost of the infrastructure (one pays of internet bandwidth but doesn't normally charge it against digital purchases).

So my claim is that in a digital marketplace the quantity supplied of a good can meet any quantity demanded. Thus classical Keynesian economic theory doesn't work well. Since by the math if supply is infinite even selling for a small cost can give good returns (cost to produce is now zero after all) there is no compelling reason to sell at a fixed cost, but demand isn't infinite.

So why do people pay for 'free' information? (and yes some don't, this isn't a piracy discussion). Given these sorts of questions I've been working on what it is that gives information value. What are the economics of information?

One answer to that explains Google's success. Information can become valuable if it is timely, which is to say it meets a need in a very time efficient way. So high frequency stock market traders pay through the nose to know a few milliseconds earlier what the trades are. Google sells the fact that someone has just looked for <query terms> to someone who thinks they have an answer related to <query terms>. Someone is looking, the advertiser can provide, so what makes a search advertisement so valuable is that the intent behind the search is 'known.' Previous venues tried to sell the 'kind of people who are looking at these pages' the demographics. A less precise form of targeting but similar.

But back to the Parse discussion, one of the factors that appears to influence information value is its rarity, or difficulty in obtaining. So a picture of some celebrity's new baby is 'rare' and 'hard to get' so a paparazzi gets a big payday when they get that picture. But a picture from the agent's press packet on the birth? Not so much.

Applications seem to be more valuable if they are perceived as being 'hard to write' (perhaps this is a variation on bike shedding) than ones that are perceived to be 'easy.' And that affects personal statements of value as well, how many developers refuse to buy an app they feel they could write in a weekend and yet non-developers flock to it?

My claim is that classic economic supply and demand models don't apply to digital goods because the supply of the goods can be infinite and the classic model suggests prices would go to zero in that scenario.

> So why do people pay for 'free' information? (and yes some don't, this isn't a piracy discussion). Given these sorts of questions I've been working on what it is that gives information value. What are the economics of information?

Of course it might be interesting to ask how digital goods are different from tangible objects in economics. But this particular question is made on a wrong assumption. Digital goods can be scarce and hence not "free" by definition.

> But back to the Parse discussion, one of the factors that appears to influence information value is its rarity, or difficulty in obtaining.

Yes, but that's no different from the classical concept of scarcity.

> My claim is that classic economic supply and demand models don't apply to digital goods because the supply of the goods can be infinite and the classic model suggests prices would go to zero in that scenario.

No, no, it doesn't suggest that. That's the problem with your argument. The theory might say that that happens in a world of "perfect competition", which is a very strong assumption. As long as someone has the publishing rights for a digital good, its low marginal cost doesn't imply higher supply and lower price.

This is not really limited to digital goods. Take a hardcover textbook or a cancer-treatment drug: its marginal cost might be a few dollars but given limited supply it can still sell for over $100.

[ disclaimer, I am a (barely) trained economist. ]

So goods have a higher perceived value based on the effort that went into them? That's probably true but I don't think that it really changes the fundamentals here. In economics, all value is perceived and supply and demand are part of the equation in every instance. If the reason dog whispering is so valuable is because it's a learned skill that I don't posses, then it's a lack of supply.

With regard to mobile apps, there is a supply of programmers with the skills to make mobile apps and this program, Parse, threatens to glut the supply of theses programmers by reducing the skills necessary to make mobile apps and this will devalue those skills in just the same way that if dog whispering were easy, it would also not be as valuable.

Now there are other effects which can lower and raise the value of something aside from supply and demand and you allude to perceived valuation in creative goods owing to perceived labor costs, and that definitely exists in certain social circles, but it's by no means universal. Otherwise, how would you explain the vast popularity of Thomas Kinkade reprints or Garfield? The people who consume this stuff generally stuff know that it's cheap to produce; they just don't care. Or why very lazy concept art often fetches a higher valuation than much more difficult classical artwork? Or why some people are willing to pirate a million dollar Hollywood movie but still pay for money for a much cheaper less labor intensive film to support and independent artist.

In other words, I might prefer labor intensive goods over cheaper equivalent goods, for the sake of novelty, moral values, economic signaling, or for many other reasons but I just as easily might not as fashions and priorities change. However, when perceived scarcity per-se makes something seem more valuable, that is literally a psychological effect of supply. Supply most definitely drives creative goods because otherwise copyright (whose whole purpose is to create artificial scarcity and reduce the supply to prop up the price of creative goods) would be a moot point.

With regard to apps, the value of an app depends both demand-side factors such as the actual utility, social factors, etc, including for some people the perceived labor cost in its production, as well as supply-side factors such as capital costs and labor costs. If I could make the app I needed in a matter of hours, having someone else make it for me might be worth nothing, or thousands depending on how I valued my time and what the app can accomplish for me.

"I do know that if we released a tool tomorrow that let you speak to your phone and tell it the 'feature' you wanted it to have, and some sort of thing went out and created that and dropped it on your phone. It would destroy the app ecosystem as we know it today."

Of course, remove scarcity and an economy ceases to be necessary. That's a much simpler explanation than the one you posit.