Daniel O'Connor | Integral Ventures, LLC
In a recent post on VentureBlog, Keven Laws discusses the importance of psychic costs--in contrast to monetary costs--in market exchange:
Chris Anderson of Long Tail fame recently posed a question in a post on the economics of abundance: what happens when it costs almost nothing to produce and stock one more item?
One surprising result is that non-monetary costs dominate the transaction. Most of you are familiar with monetary costs - pay $0.99 to download a song from iTunes (or $0.10 from AllofMp3). However, as the monetary costs fall, the most important impediments to a transaction are non-monetary: search costs and psychic costs.
Some of you may have studied the concept of "search cost" in college economics. It is the cost of finding the item you need - often measured in time and effort, rather than money. When sorting through the list of all music ever released, it would take you forever to find that piece of music you'd actually enjoy. Even at $1 a CD, you'd probably buy nothing, because you'd give up long before finding anything you'd like.
Psychic costs are less well known and more difficult to measure. They are not the $3.99 a minute it costs to get your fortune read over the telephone - that cost is very monetary. No, psychic costs measure the stress of having to think about a transaction.
My take-away: In an increasingly-knowledge-based economy with decreasing marginal production costs and expanding consumer choice, such psychic costs, particularly search costs, are becoming all the more significant in people's market decision making. We can well imagine the monetary costs to produce one additional unit of some informational good trending toward zero, while the psychic costs to choose from among the dizzying variety of such goods trending toward infinity. Hence the growing importance of psychic costs.
See Also:
