Classroom Companion: Business

7.1 
 Physical and Digital Products
Production of digital goods and services is different from standard industrial produc-
tion. Standard theory of production is based on manufacturing of physical goods 
requiring, in addition to the actual manufacturing process, retrieval of raw material, 
storage facilities for products before they are delivered to the market, and logistics for 
transporting the products to the market. All the elements of the production process 
contribute to the total cost of the product as explained in 
7
Sect. 
8.2
. The costs associ-
ated with development and later improvements of the product are usually not included 
as a contribution to the direct costs of production. These costs, together with adminis-
trative and capital costs, are usually included among the common costs of running the 
company. The total direct cost of production is then equal to the marginal cost of 
producing one item of the product multiplied by the number of items produced.
Production of digital goods is different, though all the production stages men-
tioned above may be present. The most important characteristics of the production 
of digital goods include:
5
The major cost contribution to a digital product is associated with developing 
the product itself (e.g., app, webpage, book, or program update) and invest-
ments and running costs associated with the production platform, for example, 
fees to cloud providers. Note that the running cost for producing some digital 
goods may be huge. Production of Bitcoin requires huge computer facilities 
consuming large amounts of energy. The same may apply to search engines and 
providers of massively multiplayer online games running large server platforms 
capable to accommodate millions of simultaneous players.
5
After the product and the production platform have been developed, the cost of 
producing an item of the product is almost zero (zero marginal cost).
5
Only one copy of the product needs to be stored. Copies of the product are 
produced instantly on demand.
5
Distributing a single copy of the product over the Internet costs almost 
nothing.
5
Some digital products may require “raw materials” in the form of licenses or 
other expenditures associated with each item, for example, copyrighted mate-
rial such as music, books, and films. For these products, the marginal cost is no 
longer zero.
The difference between properties of digital and physical products is explained in 
7
Chap. 
6
.