Two economic developments are currently having a profound effect on the playing field of consumer demand. One is the Great Deleveraging: the painful scaling back of the household debt burden that reached a historical peak, at 133% of household income, in late 2007. The Great Deleveraging means that household dollars that several years ago would have been earmarked for new discretionary spending are instead being diverted to pay down the hangover of old discretionary spending. As fewer dollars chase the same supply of products we would expect some combination of lower prices and/or a reduction in the quantity of products supplied – a reversal of the SKU proliferation that has been a dominant feature of our consumer experience for the past several decades.
At the same time, though, a second major event appears to be unfolding: the emergence of the economics of “free,” or “freeconomics” as provocatively described by Chris Anderson of Wired magazine in his recently published book “Free: The Future of a Radical Price.” “Free” in Anderson’s formulation is the notion that the near-zero cost of doing business online turns upside down the conventional notion of economics as the science of parsimonious choices under conditions of scarcity. The “economics of abundance” in Anderson’s phraseology may filter through the prism of our traditional understanding of markets as being good news for cash-strapped consumers (more stuff for which I don’t have to pay money) and bad news for suppliers of goods and services (“free” doesn’t sound like a price that will shore up my profit margins). Continue reading