The other day, I was living my (relatively) simple life, balling in the fine institution better known as Memorial Gymnasium, when a voice interrupted my lovely music, informing me of the new Spotify Premium for Students, now coming packaged with Hulu AND Showtime. At the fine low price of $0.99 a month for the first three months, followed by only $5 a month afterwards, I certainly thought of signing up, especially since I am not part of the 2% of free users who modify their accounts to avoid ads altogether. While this certainly got me thinking about the economics of bundling, in material more interesting and relevant to the economics of public choice, it also got me thinking of Spotify Free and Spotify Premium as a public good.
A public good is is a good which is non-excludable and non-rivalrous. Non-excludable means you cannot deny someone from using the good and non-rivalrous means one person's consumption of a good does not affect another's consumption of a good. Free Spotify accounts are non-rivalrous, as my consumption music streaming does not affect yours, and they are largely non-excludable, for as long as you have a computer of some sort with an internet connection, you can create an account and stream music. While Spotify's is broadly non-excludable, features such as unlimited skips, no ads, and the ability to listen to any song you want on mobile phones, are locked behind the paid subscription service of Spotify Premium. The reason this exists is because of the free rider problem which plagues public goods. In the context of Spotify, different individuals gain different amounts of marginal utility from every "unit" of music streaming. Working under the assumption that every unit of music streaming has the same marginal cost, there is an allocatively efficient point where the social marginal benefit of music streaming is equivalent to the social marginal cost of music streaming. Without some form of cooperation, a group will default to an allocatively inefficient output where the social marginal cost is equal to the personal marginal benefit of one of the individuals who has a relatively higher marginal utility per unit of music streaming, thus resulting in an underproduction of music streaming.
While having ads on the "free" version of Spotify helps overcome some of the costs of the free rider problem, the best way to overcome all of these costs is to create a "club" out of the fully-fledged version of the service. Per Buchanan's theory of clubs, such arrangements are able to better provide public goods nearer to the allocatively efficient outcome by adding an element of exclusivity. Goods are not simply either "public" or "private", but instead fall along a continuum of "publicness" based on exclusvity. As such, "free" Spotify with ads is more "public" and therefore less "exclusive" than Spotify Premium, which, in being behind a paywall, is closer to the allocatively efficient outcome through avoiding the free riders who do not want to pay for all the services that come with Spotify Premium. In a perfect world, Spotify would be able to charge users according to how much they would be willing to pay based the point of allocative efficiency, but because of the difficulties that come with preference revelation, the compromise of between the very public "free" Spotify and the exclusive club-like nature of Spotify Premium is a great way to prune out free riders who would otherwise take advantage of the many features available in the "complete" version of Spotify.
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