Economics of Information and Communication ITC: 230

1. Economics of Information and CommunicationITC: 230 Indra K Maharjan ME / MBS merdni@gmail.com

2. PartI: Managerial Economics Basic Chapter: 1 (Notes and Handouts) Part II: The Information Economy Chapter: 2- 9 (Carl Shapiro and Hal R. Varian. Information Rules: A Strategic Guide for the Network Economy) Part III: The New Economy Chapter: 10, 11 (Notes and Handouts)

3. Introduction “Economics of Information" is a phrase that means different things to different people. Information plays a role in all markets. The simplest kind of market theory does not apply, and markets may not be as effective.

4. Introduction Some organizations and enterprises exist mainly for the purpose of supplying information goods and services. Typical questions of microeconomics. 1) Have information products any special characteristics that set them apart, economically, from other kinds of products and services? 2) If so, what characteristics?

5. Introduction 3) What sort of markets are markets for information goods? Are they "competitive," in the sense of economic theory, or are there elements of monopoly? 4) Does a market equilibrium in information markets correspond to an efficient output, or would it be more efficient if the output were increased (or decreased) by comparison with the market equilibrium?

6. What is this stuff, "information?" A newly invented machine is patented, and the patent is licensed to a company that plans to build and sell the machine. A new edition of a best-selling travel guide is published. A public library buys 3 copies of the travel guide to lend (free) to its patrons.

7. What is this stuff, "information?" A financial advisor offers his clients advice and opinions about profitable investments in return for a commission on their investment transactions. An investor consults a World-Wide Web page for the values of "leading economic indicators" (key economic statistics) supplied by the U. S. Commerce Department. There is no charge. A collection of photographs of great paintings in world museums is put on CD-ROM and sold by a computer software company.

8. Properties An information product is a collection of symbols. Its utility depends on the arrangement of the symbols, not on the material form that they take.

9. Properties Distinctive economic and organizational characteristics of information products: Media of Transmission Uniqueness High Fixed Costs The Incentive Problem Intellectual Property

10. Media of Transmission They cannot be sold alone but only jointly with some medium of communication.

11. Uniqueness Each such product is unique. Information products are not homogenous.

12. High Fixed Costs Fixed costs for such products are high, since only the costs of the medium of communication are variable (and perhaps not all of them)

13. The Incentive Problem Because they are easily and cheaply imitated, there may be a problem of insufficient incentive to produce information products.

14. Intellectual Property Intellectual property rights are instituted in some cases to provide incentives that would otherwise be missing.

15. Properties The characteristics of information products differ in important ways from those of goods traded in "perfect" (p-competitive) markets but may, in fact, be approximated by the cases of monopoly in some cases and of public goods in other cases

16. Properties The characteristics of information products differ in important ways from those of goods traded in "perfect" (p-competitive) markets but may, in fact, be approximated by the cases of monopoly in some cases and of public goods in other cases

17. Properties Information products are thus quasi-public goods, and in extreme cases may be public goods. Profit-oriented private supply is very unlikely, and government provision may be the only alternative to doing without. Adam Smith's lighthouse is an instance of this.

18. The Internet Boom Late 1990s: “Combinatorial Innovation.'' Every now and then a technology, or set of technologies, comes along that offers a rich set of components that can be combined and recombined to create new products. The arrival of these components then sets off a technology boom as innovators work through the possibilities.

19. Combinatorial Innovation Attempts to develop interchangeable parts during the early nineteenth century : gears, pullies, chains, cams etc. Development of the gasoline engine .

20. Combinatorial Innovation (Shumpeter [2000]), combinatorial innovation is one of the important reasons why inventions appear in waves, or ``clusters,''.

21. Combinatorial Innovation After various kinds of social resistance to something that is fundamentally new and untried have been overcomed, it is much easier not only to do the same thing again but also to do similar things in different directions, so that a first success will always produce a cluster.

22. Combinatorial Innovation “demand-side'‘ and “supply-side'': since innovators are, in many cases, working with the same components, it is not surprising to see simultaneous innovation, with several innovators coming up with essentially the same invention at almost the same time.

23. Combinatorial Innovation Development of complements. The routers that laid the groundwork for the Internet, the servers that dished up information, and the computers that individuals used to access this information were all enabled by the microprocessor.

24. But the Internet revolution took only a few years. Why was it so rapid compared to the others?

25. One hypothesis is that the Internet revolution was minor compared to the great technological developments of the past.

26. The component parts of the Internet revolution were quite different from the mechanical or electrical devices that drove previous periods of combinatorial growth.

27. The components of the Internet revolution were not physical devices as all. Instead they were ``just bits.'' They were ideas, standards specifications, protocols, programming languages, and software. No delays to manufacturer, or shipping costs, or inventory problems,.

28. Where are we now? Quiet phase of combinatorial innovation: the components have been perfected, the initial inventions have been made, but they have not yet been fully incorporated into organizational work practices.

29. The “New Economy'' We need a new economics to understand the new economy of bits. Effects that were uncommon in the industrial economy-like network effects, switching costs, and the like-are the norm in the information economy

30. The “New Economy'' Personalization of products and prices, Versioning Bundling Switching costs Lock-in Economies of scale Network effects Standards, and systems effects.

31. References:(Carl Shapiro and Hal R. Varian. Information Rules: A Strategic Guide for the Network Economy)