| Definition: | Marginal costs are the costs associated with creating an additional unit of product. This is similar to variable costs, which are the costs that increase directly with the increase in production (unlike fixed costs). Digital products typically have very low marginal costs, when compared with traditional goods (materials, labor etc.) and if the product is distributed via a web site, then the marginal costs can be zero. The consumer is bearing the distribution costs, and there are no packaging costs. This is why companies are able to market their products for free on their web sites, in order to try to entice further purchases at a later time (in the hopes of creating lock in perhaps). Netscape pioneered this approach and was able to offer its versions of its browser on its web site, changing the way software is marketed. This enabled them to create significant market share very quickly. They were able to do this, due to zero marginal costs.
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