Prof. Jason POTTS

Associate Professor, School of Economics, Finance and Marketing, RMIT University, Australia

The Alchian-Allen Theorem and the Evolution of New Media Industries

Abstract. I present a lesser-known but important theorem in applied microeconomics – the Alchian-Allen effect – and explain why its inverse is central to understanding the evolution of creative and new media industries. The theorem states that when a fixed cost is added to substitute goods, consumers will shift to the higher quality item (now relatively less expensive). But the theorem also holds in reverse, when a fixed cost is removed from substitute items we expect a shift to lower quality consumption. The internet has dramatically lowered fixed costs of access to media consumption, and various development platforms have similarly lowered the costs of production. Alchian-Allen predicts a shift to lower-quality, ‘bittier’ consumption (Cowen 2009). I outline why this effect is expected to hold and how this will affect new media business models and production, intellectual property and regulation, and consumer behaviour with respect to novelty.