In some sense, much of the practice of law, legal publishing, law libraries, and related organizations are the selling or exchange of information. Lawyers take elements of existing documents and other sources of information, whether primary law or commentary, and analyze them in light of their knowledge and expertise to create advice and work products like contracts, and services like navigation of the court system. In turn, legal publishers and libraries produce and present these documents in a way that is designed to facilitate finding the information in the most efficient way possible.
Information is known to be an interesting kind of product in economic terms. Ken Arrow discussed it as follows, which gave rise to the economic principle known as Arrow’s Paradox:
“[T]here is a fundamental paradox in the determination of demand for information; its value for the purchaser is not known until he has the information, but then he has in effect acquired it without cost.”
Arrow, Kenneth J. (1962), Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity, pp. 609-626, National Bureau of Economic Research.
There is a good reason why lawyers need to get retainers: unlike a house, the products they provide can’t be repossessed, and it’s difficult to know how much they are worth. Lawyers aren’t selling a win, they are selling information, advice, and services which aim to optimize the outcome based on the situation. Improved information is worth a great deal to clients in aggregate (I have done some research into the value of improved information for parties to litigation here), but it’s difficult to know how much particular information will be worth in a particular situation before it is acquired.
This leads to difficulties in how to price legal services, because lawyers want to make a good return on their labour and expertise, and clients tend to want to pay less than their services may be worth because they are informational in nature. Given this dynamic, it makes sense that lawyers would look for a mechanism like the billable hour to quantify the value of the work they deliver.
In turn, the work publishers and libraries do is also difficult to price. Large commercial legal publishers are well known for not disclosing the prices associated with their sales contracts and a large part of this is because they are trying to harvest as much value as possible from each customer. Different areas of practice are more or less profitable and different people value particular research tools differently, which means that they have different willingness to pay.
By charging everyone different rates, the publishers aim to get the maximum value customers are willing to pay. They don’t have to give up the higher rates some are willing to pay that they would lose if prices were set, and don’t have to forego the income they get from customers who have a lower willingness to pay. It’s a strategy that maximizes revenue, but it does tend to alienate customers who may feel they are being taken advantage of.
If we come back to the billable hour in legal practice, generally pricing products based on inputs like the costs associated with making them and marking them up to make a certain margin is not a sophisticated strategy because it doesn’t capture all the value that customers ascribe to them. But if customers tend to value products lower than the inputs suggest they should, it is logical to try to convey their value in another way, such as the amount of time required to produce them.
The price of published legal information has been under discussion for the last 30 years if not more, and surely the price of legal services has been discussed at least that long. There are pressures to increase prices from publishers and other suppliers of information, and pressures to keep them low from customers. Given the difficulty in pricing information, the large commercial publishers use mechanisms like trying to quantify customers’ time saved to justify prices. In the early 1990s when Lexum started publishing the Supreme Court of Canada decisions online, access to a single SCC decision online was priced at $200-300. Prices like this were justified by estimating how long it would take a lawyer to pull a document from a library, and they were high enough that it encouraged the law societies to create CanLII to break the oligopoly in publishing of primary law.
That said there are forces that are combining to raise the cost of legal services and legal information. Legal services and publishing are labour intensive to create (though with automating some tasks they are becoming less so), and Baumol’s cost disease predicts that the price of labour intensive activities, like education, medicine, and the practice of law, will go up against the price for other things that are less labour intensive.
This is because salaries in sectors that experience productivity gains go up as some of the increased value those workers create is directed to them. Workers in other sectors expect to have similar wage gains, which means that the products they produce become more expensive relative to the products that experienced those gains (Malcolm Mercer has also written about cost disease in Slaw here: “Cost Disease, the Practice of Law and Access to Justice” in November 2017).
Since 2008 there have been significant changes in clients’ willingness to pay for legal services, which has in turn reduced people’s willingness to pay for legal information resources. This has pushed lawyers’ clients, especially large ones to stop being price takers and move toward being price makers in the market for legal services. I hope to see customers of legal information resources push for the same.