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The Information Economy

Explore the intricate web of complementary products, cost structures, and unique features in the information economy. Learn about rights management, consumption characteristics, technology, network effects, and strategic choices in this evolving landscape.

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The Information Economy

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  1. The Information Economy Carl Shapiro Hal R. Varian

  2. Systems of Products • Complementary products • Hardware/software • Client/server • Viewer/content • Product lines • High fixed cost, low incremental cost • Leads to value based pricing

  3. Unique Features • Complements • Different manufacturers • Strategy for complementors as well as competitors • Compatibility as strategic choice • Standards and interconnection • Product lines • Lower quality may be more expensive

  4. Information • Anything that can be digitized • Text, images, videos, music, etc. • a.k.a. content, digital goods • Unique cost characteristics • Unique demand characteristics

  5. Cost structure • Expensive to produce, cheap to reproduce • High fixed cost, low marginal cost • Not only fixed, but sunk • No significant capacity constraints • Particular market structures • Monopoly • Cost leadership • Product differentiation (versioning)

  6. Rights Management • Low reproduction cost is two-edged sword • Cheap for owners (high profit margin) • But also cheap for copiers • Maximize value of IP, not protection • Examples • Library industry • Video industry

  7. Consumption Characteristics • Experience good • Browsing • Always new • Reputation and brand identity • Overload • Economics of attention • Hotmail example • Broadcast, point-to-point, hybrid

  8. Technology • Infrastructure to store, retrieve, filter, manipulate, view, transmit, and receive information • Adds value to information • Web = 1 terabyte of text = 1 million books • If 10% useful = 1 Borders Bookstore • Value of Web is in ease of access • Front end to databases, etc. • Currency

  9. Systems Competition • Microsoft-Intel: Wintel • Intel • Commoditize complementory chips • Microsoft • Commoditize PCs • Apple • Integrated solution • Worked better, but lack of competition and scale led to current problems

  10. Lock-In and Switching Costs • Example: Stereos and LPs • Costly switch to CDs • Systems lock-in: durable complements • Hardware, software, and wetware • Individual, organizational, and societal

  11. Network Effects • Value depends on number of users • Positive feedback • Fax (patented in 1843) • Internet (1980s) • Indirect network effects • Software • Expectations management • Competitive pre-announcements

  12. Compatibility • Examples • Beta v. VHS • Sony v. Philips for DVD • Role of 3rd parties • Read v. write standards • Backwards compatibility? • Windows 95 • Windows NT

  13. Basic Strategies • Go it alone • Partnerships (Java) • Formal standard setting • Widespread use • Licensing requirements • Competition in a market or for a market?

  14. Policy • Understand environment • IP policy • Competition policy • Regulation • Antitrust • Electronic commerce • Contracts • Privacy

  15. Information is Different…but not so different • Key concepts • Versioning • Lock-in • Systems competition, • Network effects

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