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