How can one seriously expect an entire economy to be based on something that is absolutely free? Doesn't it violate some fundamental economic law, just as producing something out of nothing violates the Law of Conservation of Mass in Physics? Let us examine whether it does.

We realize it is not possible for any supplier to charge less for a product than it cost them to produce it. That would mean a loss. At the same time, if all products in a category are roughly alike in function, and there are plenty of suppliers for those products, it is not possible for any of them to charge significantly more than their competitors without pricing themselves out of the market. So they should all end up charging just slightly more than it cost them to make the product, making only modest profits in the process. The underlying assumption here, though, is that we have "pure competition".

"Pure competition" in economics means a buyers' market. Consumers love it and suppliers hate it (though, curiously, all suppliers claim to welcome it). A competitive market means that consumers can easily find any number of alternative suppliers for a product. It also means the product is a commodity.

A "commodity" product means that there is very little differentiation between the various versions of a product. They all do the same thing, with only minor, insignificant differences. Consumers don't bother about brands when buying commodities. Suppliers hate commoditization for the same reason and try their best to create artificial differentiation.

The best example is the Vodka Paradox: Vodka, by definition, is a colorless, odorless and flavorless drink of a specific composition; so all vodkas should be the same! But we know of both premium and downmarket brands of vodka, so at least some of them are, by definition, not vodka at all!

Look at the software market from these angles. Is it competitive? Is it a commodity market? Think about whether it would be easy for you to replace Windows on your PC with another operating system. Think about whether such a system would work the same way. Such an analysis may suggest that this is neither a competitive nor a commodity market. However, these aren't very straightforward questions to answer because some recent developments have impacted the market a great deal, but we'll come back to them a bit later.

The important point to note is, if the software market becomes a competitive commodity market, the price of software should be close to the cost of producing it. That's what, economic commonsense says, should happen.

"Is software a commodity?"