menu

There Are no Widgets - Types of Goods

The law of supply and demand applies differently depending on the exact types of goods.

Although all goods are subject to the law of supply and demand, the exact ways in which the law of supply and demand applies to them are quite different.

For example, the law of supply and demand applies differently on perishable vs durable goods. Specifically, perishable goods are consumed completely in one period and have to be replaced entirely in a later period. On the other hand, only part of the stock of durable goods that wears out in one period has to be replaced in a later period. The problem of over-capacity arises for durable goods when a good is made more durable because replacement demand will be reduced in later periods.

Similarly, mature products vs innovative products have different implications for pricing and market structure. Sellers of innovative products have few or no competitors and can thus aggressively price discriminate to capture most of the economic surplus1. On the other hand, sellers of mature products have many competitors and must share the economic surplus with consumers through single pricing.

Besides durability and innovativeness, goods could also be distinguished by:

• Consumption rivalry and excludability of non-payers – private goods vs public goods.

• Income elasticity of demand – normal vs inferior goods.

• Cross price elasticity of demand – complementary vs substitute goods.

• Consumption externality – independently-used goods vs networked goods.

• How the goods are paid for – first-party vs third-party payment goods.

• Openness of standards – closed-standard vs open-standard goods.

• Hierarchy of needs – necessities (commodities) vs luxuries (life-style goods).

• Sharability – access vs ownership.

While it is convenient to use the term widgets to represent a generic class of goods, such imprecision is likely to confuse the issues at hand and should be avoided by specifying the type of goods in question.

Notes:

  1. What consumers are willing to pay minus the marginal cost of production.

Glossary:

  • complementary goods
    Two goods (A and B) are complementary when an increase in quantity demanded for A due to a price decrease of A leads to an increase in demand for B and vice versa. For example, when airfare to Hawaii goes down, more tickets are sold. That is, quantity demanded increases. When more tickets are sold, more hotel rooms at Hawaii are needed even though hotel rates have not changed. That is, demand has increased. (Note: Professor Richard Evans provided this example.)
    diagram
  • consumption rivalry
    The inability of a good to serve simultaneously more than one user without quality degradation. For example, there is consumption rivalry for an apple between more than one user. But there is no consumption rivalry for public radio signals among listeners. See also "private goods," "public goods," "low-congestion goods," and "commons goods."
    diagram
  • inferior good
    Goods that are purchased less with higher income, such as generic products or house brands.
  • cross price elasticity of demand
    Percentage change in quantity demanded of good B over percentage change in the price of good A. If the resulting ratio has a positive numerical value, A and B are complements. If the resulting ratio has a negative value, A and B are substitutes.
  • externality
    Free benefits conferred or uncompensated cost imposed on innocent third parties due to unassigned or poorly assigned property rights or when the cost exceeds the benefit of exercising properly assigned rights.
  • normal good
    Goods that are purchased more with higher income and less with lower income.
  • private goods
    Goods that are subject to consumption rivalry but can easily exclude non-payers.
    diagram
  • single pricing
    Charging the same price to all buyers regardless of their reservation prices in one pricing period. Those buyers whose reservation prices are higher than the single price will gain consumer surplus. All sellers who are not practicing perfect price discrimination are single pricers to various degrees. However, price takers individually have no power to change the single price. Only price searchers can adjust their single prices to take advantage of varying demand elasticities over prices.
    diagram
  • commodities
    Goods that are so homogeneous that sellers have little or no pricing power.
  • excludability
    The ability to exclude non-paying users.
  • public goods
    Goods that are not subject to consumption rivalry but cannot easily exclude non-payers either by design or due to technical difficulty.
    diagram

Topics:

Type of goods

Keywords

capacity, closed-standard goods, complementary goods, durable goods, first-party payment goods, independently-used goods, inferior goods, innovative products, mature products, networked goods, normal goods, open-standard goods, Perishable goods, price discrimination, private goods, public goods, replacement, single pricing, substitute goods, third-party goods, widgets