Thesis project

Micropayments doesn’t work because they aren’t easy enough. Even if the amount requested is only a couple of cents, the transaction cost of just clicking through all the steps with your payment provider (in some cases providing all your VISA details and in other logging in with your e-mail and password) is often to high. For me at least, its rare to find information on the web that I figure would be worth this trouble without having the possibility to consume it beforehand.

This has however been a major reason to believe in the future of micropayments, they would work if they were one-click or even automatic. The evidence of this model would be the iPhone App Store, where buying stuff is so easy (only insert your account password) that the transaction cost of the payment itself becomes close to zero. I’ve bought tons of stuff in the App Store without even reflecting on if the application is worths it’s price (most applications are priced at a low 7 SEK).

However, something is missing in my transaction cost calcuation: the transaction cost of having to make a decision. Interestingly, this is the sole focus of transaction costs in Chris Anderson’s book Free! when he tries to explain the difference between price and zero price.

Chris Andreson refers to the George Washington University economist Nick Szabo’s concept of “mental transaction costs” (more on mental accounting). Basically the mental transaction cost is the value we put on not having to think about a buying decision, the mental part of our different feelings towards price and zero price.

These two transaction costs (the effort of the body in filling in VISA details and the effort of the mind to make a conscious decision) together with the price itself sum up to the total transaction cost of a buying decision.

What still bothers me is the App Store situation, how come my perceived mental transaction cost is so low in that particular setting? Could the App Store hold the key to the future of other micropayment systems?