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Digital NetworksKathy E. Gill
11 January 2012
What Is An Info Economy?
“An economy based on the exchange of knowledge information and services rather than physical goods and services.”
Australian Gov ’t, Dept. Finance and Administration, 2001.
What is Information? In the context of this class, anything that can
be converted to bits, ie, digitized, is an information good Entertainment News Business Info Software
What is Information Technology?
Telecommunications, computers, softwareCommunication: E-mail, IM, TheWebNetworks: Extranet, Intranet, Internet, LAN, WANSoftware: Expert systems, Enterprise Resource
Planning, Query and Reporting, Data MiningNetworks: T1, T3, Wireless, WiMaxProtocols: HTTP, FTP, VoIP, GoogleWave?
Competing Theories
Technology optimistsA new society without pollution; time for
creative work; participatory democracy; perfect markets…
Technology pessimistsNo new society but an increase the
divide between rich and poor; greater control over individuals; erosion of privacy…
Technology + economics +society
Summary
Use whatever label you wish … the makeup of our economy has changed. Information as a good and information technologies have replaced goods made of atoms and technologies resting on muscle.
What Is Economics?
Economics is the study of how people (and institutions) act in a society with limited resources (iow, scarcity)The choices are more diverse than
simply $$ - it’s also time, work, savingsDriving principle: that people optimize
the “utility” (satisfaction) of goods and services consumed - that we are rational
Supply-Demand
Economics of Information
Costly to produce Inexpensive to re-produce Economist-speak:
High fixed costs, low marginal costs
Economics of Attention
Info overload: “a wealth of information creates a poverty of attention” (Herbert Simon)
Types of Goods (1/2)
Non-rival - a good that can be used by more than one person at the same time (an idea)
Non-excludable - it is not possible for the “owner” to exclude others from consuming this good (non-patented idea)
Types of Goods (2/2)
Rival Non-Rival
Excludable
• Most consumer goods• Private land• Services• Single license software
• Trade secrets• Multi-license software• Patents• Subscription web sites
Non-Excludable
• Public land• Most roads• Water - rivers, lakes
• “Public Goods”• Basic research• Defense, police, firemen• Lighthouse• “Open” websites• TV (not cable!)
Excludability and Information From the World Bank: Assume someone
produces a valuable theorem, but it cannot be kept secret -- it must be made immediately available. Because anyone can immediately use it, there is no way for an individual to profit from creating it.
Types of Excludability (traditional) Trade Secrets (Coca Cola) Patents (Amazon One-Click) Copyright Will people create knowledge if they can’t charge
for it? WB says No. Open source movement says Yes.
Digital Excludability (transitional?)
DRM iTunes, Amazon Difference in video and music
Subscriptions RealNetworks and Napster, The Economist and
the WSJ Lawsuits
An Experience Good
A good is an “experience” good if a consumer has to experience it to value it Various biz strategies encourage “try before you
buy”
Complementary Goods
CDs + CD Player Websites “optimized” for a specific browser Bluetooth headset & cellphone Issues: network effects & lock-in
NETWORK EFFECTS (1/2)
Static analysis: One person’s decision to adopt a new piece of
software (or other technology) has no effect on someone else’s welfare or decision to adopt
Assumes no network externality
Network effects (2/2)
Dynamic analysis: The value of the software (or technology)
depends upon the decisions of others (interoperability, for example)
Assumes there is a network externality
Locked In!
Consumers may be locked into a network because of “cost of exit” (switching)Contracts (cell phone 24-month policies)Training (learn a new system – ugh)Data conversion (from Word to Word Perfect, for
example)Search cost (finding the new product)Loyalty cost (frequent flyer programs, “minutes
carry-over”)
Tipping
As market share increases for any one product (system, technology), there are increasing returns (externality) from increasing consumer demand, leading to dominance by one system
EXAMPLES AM v FM radio Beta v VHS Mac v Windows QWERTY v DVORAK BlueRay v HD-DVD GSM v CDMA
Conclusion (1/2)
Economy is increasingly reliant on information technologies and information
Firms in this sector have a different cost structure than traditional goods/sectors like ag or manufacturing
Conclusion (2/2)
The products in this sector have characteristics of a public good -- the antithesis of a scarce, excludable good
Thus information technology is disruptive, economically and socially
Resources (1/3)
The Inkjet Printer, from The Economist. (2002) http://emlab.berkeley.edu/users/bhhall/e124inkjetprinter.html
The Invention of Email, from Pretext Magazine (1998) http://emlab.berkeley.edu/users/bhhall/e124emailinvention.pdf
Hal R. Varian , “High Technology Industries and Market Structure” (2001) http://www.sims.berkeley.edu/~hal/Papers/structure/structure.html
Science and Engineering Indicators (2002) National Science Board. http://www.nsf.gov/sbe/srs/seind02/start.htm
Resources (2/3)
Michael L. Katz and Carl Shapiro. “Systems Competition and Network Effects,” Journal of Economic Perspectives, Vol 8 No 2 (1994)
Nicholas Economides. “The Economics of Networks,” International Journal of Industrial Organization, October (1996) http://www.stern.nyu.edu/networks/top.html
S.J. Liebowitz and Stephen E. Margolis. “Network Externality: An Uncommon Tragedy,” Journal of Economic Perspectives, Vol 8 No 2 (1994)
Resources (3/3)
Timothy F. Bresnahan. “The Economics of the Microsoft Case.” http://www.stanford.edu/~tbres/Microsoft/The_Economics_of_The_Microsoft_Case.pdf
Stephen Martin. “The Nature of Innovation Market Failure and the Design of Public Support for Private Innovation” http://www.sam.sdu.dk/undervis/92172.E03/martin_scott.pdf
Tore Nilssen and Lars Sørgard. “TV Advertising, Programming Investments, and Product-Market Oligopoly” http://www.nhh.no/sam/res-publ/2000/dp06.pdf