New Study by Erik Brynjolfsson Measures the Value of Digital Goods, Such as Facebook and YouTube

By TAP Staff Blogger

Posted on March 29, 2019


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New Study Measures How Much Free Online Goods Are Worth to Consumers.

 

We find that digital goods generate a large amount of consumer welfare that is currently not captured in GDP. For example, the median Facebook user needed a compensation of around $48 to give it up for a month.
    - from “Using Massive Online Choice Experiments to Measure Changes in Well-Being” by Erik Brynjolfsson, Avinash Collis, and Felix Eggers

 

The Gross Domestic Product (GDP) provides a sum of the value of purchased goods; it is often used to determine the economic performance of a whole country or region, and sometimes is used as a proxy for economic well-being. But given that the GDP uses market prices to derive the total value of final products and services, “products that have a price of zero, which include most smartphone applications, Wikipedia, Facebook, and so on, have zero direct contribution to GDP.” (Calculating Economic Well-being in the Information Age,” MIT Newswire)

 

A new study by MIT professor Erik Brynjolfsson and his colleagues Avinash Collis and Felix Eggers puts a dollar value on all those free digital goods people use, and builds the case that online activity can and should become part of GDP someday. “Using Massive Online Choice Experiments to Measure Changes in Well-Being” shows how using massive online choice experiments provide estimates of the value created by specific goods, like Facebook. This has “the potential to reinvent and supplement the measurement of economic well-being more generally.”

 

Read the full study: “Using Massive Online Choice Experiments to Measure Changes in Well-Being.”

Written by Erik Brynjolfsson, Director of the MIT Initiative on the Digital Economy, Avinash Collis, a doctoral candidate at MIT Sloan, and Felix Eggers, economics professor at the University of Groningen in The Netherlands. Published in the Proceedings of the National Academy of Sciences (PNAS), March 2019.

 

Additional Reading:

 

Calculating economic well-being in the Information Age: A new study by researchers at MIT Sloan measures the value that digital goods and services create
MIT Sloan School of Management Press Release, March 26, 2019

 

In massive online choice experiments, 'internet search' emerges as most valued category of digital goods; researchers stress need for additional economic measures besides GDP.

 

According to the study published today in the Proceedings of the National Academy of Sciences, internet search is the most valued category of digital goods. The median user would require compensation of $17,530 to forgo search engines for a year. Users would need $8,414 to lose access to email for a year, and $3,648 to go without digital maps for that same period, according to the study.

 

"We knew intuitively that the rapid pace of innovation and the widespread adoption of digital goods and services have had an important effect on our economic welfare—but our research demonstrates just how valuable these modes of communication are to many people," says Prof. Brynjolfsson, co-director of MIT's Initiative on the Digital Economy. "These services are so tightly integrated into people's daily lives for coordination with family, friends, and colleagues and they add a lot to our overall well-being."

 

Facebook is free, but should it count toward GDP anyway?
MIT News, March 26, 2019

 

To conduct the study, the researchers used three large-scale online surveys in which consumers were asked to put a price tag on the free online services they consume. In many cases, respondents were asked whether they would prefer to keep using a free online good, or to name a price that would compensate for losing access to that product. All told, the surveys drew about 65,000 responses.

 

The study produced a number of distinctive findings regarding online services and specific companies. For instance, consumers placed an average annual value of $1,173 on online video streaming services such as YouTube and Netflix. To be sure, these video platforms, among others, do charge fees to some consumers — although those are typically $10 to $20 per month.

 

Either way — free or with modest charges — the surveys reveal that online video use generates a significant amount of “consumer surplus,” that is, the value for consumers beyond the prices they pay. In these cases, online video providers “create a lot more value then they capture,” says Avinash Collis, a doctoral candidate in information technologies at the MIT Sloan School of Management, who helped develop the new study.

 

Measuring the Value of Digital Goods and Services
Medium, March 26, 2019

 

According to Brynjolfsson, the data show that the digital economy is contributing more value than realized. “When you consider that 15 years ago, these services didn’t exist, this is a very rapid rise” in consumer value, he said. It points up that “these services are tightly integrated into people’s daily lives for coordination with family, friends, and colleagues, and they add a lot to our overall well-being.”

 

That doesn’t mean the demise of GDP, Brynjolfsson says. “GDP is still a valid measure of production, but we also need to more precisely measure the benefits we get from digital goods and services.” Going forward, policymakers and economists who want to understand growth trends need a complete view of the market. In addition, new metrics may help businesses develop dashboards for investment purposes and for new product development. “When data isn’t being captured, it’s not part of the conversation. We want to change that,” Brynjolfsson says.

 


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