Can Price Discrimination Save Twitter?
We discussed this on Zoom
When you have a business on the Internet that involves distributing bits, as opposed to atoms, you have high fixed cost and low marginal cost. The marginal cost of serving the next customer with this essay is zero. So I want to charge very little for reading the essay.
My aphorism is that “Information wants to be free, but creators need to make money.” We have to recover fixed cost somehow.
One approach is bundling. Most substack writers put paid subscriptions into a bundle of rights for the subscriber. One of the most interesting rights to include in a bundle is the right to comment. The inability to comment can be so frustrating that you are willing to pay to subscribe, just so you can make your point.
Digital goods are often “experience goods.” You have to be able to try before you are willing to buy. So publications that want you to subscribe might let you read a few free articles before putting up the paywall.
When there is high fixed cost and low marginal cost, it pays to engage in price discrimination. You want the consumers with the least elastic demand to pay more, so that they help cover your overhead. Because marginal cost is low, you can charge less money for consumers with elastic demand, because you still get something from them.
Consider a drug company. It takes hundreds of millions of dollars to get the first pill approved, but after that the marginal cost of producing more pills may be pennies. So you want to price discriminate. One way to do that is to charge less in foreign countries (where people are more price sensitive) than in America (where people are less price sensitive, especially when insurance picks up the cost). If America were to outlaw this practice, by making it easy for Americans to acquire drugs at the overseas price, then drug companies would not be able to price discriminate. This would make it harder to bring drugs to market profitably, leading to fewer drugs for consumers.
That brings us to Twitter. Who are the users who depend on Twitter the most? Academics who want to follow and be followed within their specialty. And journalists who want a cheap source of content and the ability to build their personal brands. And jerks who get pleasure out of being nasty. How can Twitter capture revenue from these users, whose demand is likely to be inelastic?
It seems to me that the way for Twitter to price discriminate is to charge a subscription fee for a bundle of rights that includes: having more than, say, 500 followers; being able to use direct messaging; being able to have your tweets retweeted.