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Software Economics Economics 101 - PowerPoint PPT Presentation

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Software Economics Economics 101 What is the economics of the software industry that gives its products free over the Internet? The Wealth of Nations, by Adam Smith During the 18th century, roads and canals altered how people did business

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Software Economics

Economics 101

the wealth of nations by adam smith
The Wealth of Nations, by Adam Smith
  • During the 18th century, roads and canals altered how people did business
  • Today, the electronic network, a.k.a. the Internet, is doing the same
  • Both types of networks have resulted in a rise in trade volume
how is the internet made possible
How is the Internet made possible?
  • Through advanced technology: via MODEMS
  • Ability of modems has increased:
    • less data distortion and more data compression
    • internal modems
    • line probing
    • multidimensional trellis coding
    • protocol spoofing
economic theory behind the industry software
Economic Theory behind the Industry Software
  • Law of INCREASING Returns, not Diminishing Returns
  • High fixed cost and low variable cost
high profits due to increasing returns
High Profits due to Increasing Returns
  • High fixed cost: Research and Development
  • Low variable cost: production and distribution of software
  • Cost for distribution of software via Internet is close to zero
target computer owners
Target Computer Owners
  • Computers are becoming more and more a normal good
  • Software packages are complementary goods to computers
  • Some software programs still remain a luxury good
what this means
What This Means
  • Potential customers: people with a higher income
  • Attract buyers by giving a free sample via the Internet
next steps keeping the customers
Next Steps: Keeping the customers
  • Software must be good and reliable product
  • Sell upgrades or new versions of the software
  • Network externalities: other companies build around your software
what about other competitors
What about other competitors?
  • High opportunity cost for customers to switch
  • The firm with the better technology dominates the market
demand side economics
Demand-side economics
  • The pre-Internet market was dominated by a monopoly or oligopoly (Microsoft, Macintosh, etc.)
  • Post-Internet market is very unpredictable
    • Role of government?
    • Darwinism: Survival of the fittest
what is the economics behind the software industry
What is the economics behind the software industry?
  • Law of Increasing Returns
  • Formation of monopolies
  • Establishment of a strong customer base
  • Little regulation by the government