Strategic bundling: Information products, market power, and the future of globalization

Abstract

Strange argued that barriers to trade have fallen because increasing returns in product development and production: rising R&D costs, short product life cycles and low marginal costs of production raise the relative cost of producing for protected national markets. As an explanation for global ( as opposed to regional) liberalization, Strange's argument requires that increasing returns be extreme. The class of products exhibiting the most extreme increasing returns is that of information products-goods such as general purpose computer software and digitized entertainment. Following Strange's reasoning, it might seem that the technological nature of information products is one of the drivers of global trade liberalization. The trouble with this argument is that while the technological properties of information products are necessary for extreme increasing returns, they are not sufficient. Increasing returns in information products are cemented by business models which leverage small portfolios of intellectual property into the control of markets. Information products are, however, equally well suited to other business models in which increasing returns are slight and competitors are many. To continue with the software and entertainment examples earlier, these include models based on free software, and on disintermediated markets for digitized entertainment. At present, the institutional structures within which information products are made and sold, are contested. The outcome of these contests could result either in the maintenance of monopoly power and increasing returns, or a shift to far more competitive and decentralized market structures. If the latter occurs, the increasing returns imperative for global trade liberalization would be weakened