In the physical world scarcity is what leads to value.

In the digital world abundance is what leads to value.

Or atleast thats what Fred Wilson claims (follow up post)

In econ 101, they try to teach you that the demand curve slopes downwards, that as P (price) increases, (Q)demand decreases. Furthermore, the supply curve behaves the opposite way, as P (price) increases, (Q) supply or willingness of sellers to sell in quantity increases. The equilibrium price and quantity sold/bought is when the two curves meet.

“Scarcity” is an interesting concept in economics . . . because it can be either real or manipulated (cartels, monopolies). Eitherway, scarcity shifts the supply curve up wards and to the left - for whatever reason, the producer (increase in marginal cost?) decides that for the same price, it is now willing to produce LESS. . . or to sell the same amount, it would like to get paid more. Scarcity in economic terms is about the supply curve rather than about the demand curve. Because of the shift in supply curve, price goes up as the supply curve intersects the demand curve at the higher point. (note that the demand curve did nto move)

Fred’s first sentence is suppose to be a popular way of explaining this situation . . .

In the physical world scarcity is what leads to value.

What technically it should say is “increase in price” rather than value because value is an amorphous term that might not be correct to use here. AND only when a existing demand curve exists.

In the digital world abundance is what leads to value

Here lies the crazy supposition with the second thesis. . . that if the supply curve shifts down and to the right due to abundance, because seller is willing to sell more at the same price, the intersection with the demand curve will actually be higher than before NOT lower! . . . thats technically not possible. . . ! according to most economic theories. . .

After I read more the example that Fred gave, I realized that Fred is using the wrong terms. . . scarcity/abundance applies to the supply curve (no duh), but the use cases he gave actually works on the DEMAND curve rather than supply curve. . .

The photobooth example and the Jonas Brother example is more about using pervasive (or “abundant”)marketing techniqeues to increase awareness & distribution and thus induce demand from consumers and thus shifting the demand curve up and to the right causing prices to go up.

This is really not that revolutionary. . . to sell shampoo you gotta make sure you get it wide distribution at everywhere your target customers are . . . and if you can give away samples to prove value and stoke demand. . . you do it even if its at a loss.

What DIGITAL goods do get you (as we know from 1999) is cheap, wide, self-replicating distribution channels with significant word of mouth that creates opportunities to increase awareness and prove value proposition. All web 2.0 has done is to increase the DEMAND curve up and to the right leveraging more effective marketing/distribution channels.

I would modify Fred’s thesis in the following ways

In the physical world scarcity is what leads to value ONLY when an existing demand exists

In the digital world abundance is what creates awareness and enables peer distribution which leads to increase in demand

Both of which are complementary, adheres to basic econmic theories, and is basic business pratices . . .

The caveat here is that given “unlimited” and easy supply of a good (not just awareness or distribution, but the actual good. . . like if downloading free mp3 is as easy as itunes, for example), you might be able to increase demand, but monetizing that demand will be hard because there are unlimited supply (ie demand and supply curves are shifting at the same time).

The way to monetize this is do what Jonas Brother is doing through upselling CD’s . . . by creating a second complementary good that does not have unlimited supply. . . . its again the classic loss leader strategy.