Sunk and Opportunity Costs Sunk Term Paper

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If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent and the pleasure you forgo by not reading the book. The word opportunity in opportunity cost is actually redundant. The cost of using something is already the value of the highest-valued alternative use. Nevertheless, as contract lawyers and airplane pilots know, redundancy can be a virtue. In this case, its virtue is to remind us that the cost of using a resource arises from the value of what it could be used for instead. (Henderson, 2002)

Opportunity costs refer to the costs associated with giving up an opportunity. They are relevant in the marketing of digital products when one considers the value lost to the company when giving away a product free. Since digital goods primarily consist of fixed costs and often have zero marginal costs then marketing strategy often dictates to give-away a version of the product to encourage consumers to upgrade later (assuming lock-in etc.) the only cost incurred here would be the opportunity cost of the lost revenue from the consumers that would have paid for this version of the product in the first place.

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To avoid this situation, companies typically segment their markets, and offer a free product, with limited functionality (and no customer support or documentation) to a casual user group, and an upgraded version, at a price, with customer support etc. To a more sophisticated customer. The company will hope the casual user will upgrade to the upgraded version as they become more sophisticated users and more reliant on the product. They also assume the sophisticated user will not be satisfied with the free version, due to its lack of functionality. (Staff, 2004).....

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