Market failure in the media sector?

Eli Noam is professor of economics at the Columbia University in New York and just writes in the Financial Times a very provocative paper. To him, "we need to recognise that the entire information sector - from music to newspapers to telecoms to internet to semiconductors and anything in-between - has become subject to a gigantic market failure in slow motion. A market failure exists when market prices cannot reach a self-sustaining equilibrium. The market failure of the entire information sector is one of the fundamental trends of our time".

Excerpts of the FT.com article:

"The basic structural reason for this problem is that information products are characterised by high fixed costs and low marginal costs. They are expensive to produce but cheap to reproduce and distribute, and therefore exhibit strong economies of scale with incentives to an over-supply. Second, more information products are continuously being offered to users. And information products and services are becoming more "commodified", open, and competitive...

... Thus, the information economy is likely to be a volatile, cyclical, unstable mess. The problem is not the "creative destruction" one would expect in an innovative economy, but the structural instability of an economy whose major products have very low marginal costs and hence prices, but are not low-cost to produce. The notion that an information-based economy will be inherently prosperous must be revised for a less optimistic scenario."

The writer is professor of economics and finance at Columbia University and director of its Columbia Institute for Tele-Information.

The whole story on FT.com.