the information economy

Chapter 11The information economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith... Experience prod

Chapter 11

The information economy

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith

Use of the internet

0 200

400

600

800

1000

1200

£bn.

1997 1999 2001 2003

Business to business use of the internet

 An e-product:

– can be digitally encoded then

transmitted rapidly, accurately and

cheaply

e.g music, films, books, sport …

 Fixed costs of producing e-products are huge …

 … but marginal costs of distribution are tiny

 implying vast economies of scale

Consuming information

 experience

 overload

 switching costs

 network externalities

Four key features of e-products:

Experience products

 An experience good or service is one that must be sampled before the user knows its value

– information is nearly always new

– marketing needs careful attention

 free samples

 previews

 establishing reputation

Information overload

 … arises when the volume of

available information is large

 …but the cost of processing it is

high

 screening devices become crucial

Switching costs

 … arise when existing costs are sunk

 so changing supplier incurs

additional costs

 smart suppliers devise strategies for locking in their customers

 e.g air miles, supermarket reward cards

Network externalities

Suppose D 1 represents the demand curve for a product exhibiting network externalities

£

Quantity

D 1

P 1

Q 1

With price at P 1 , demand is limited.

If price is reduced to P 2 , more people find the network attractive

so not only is there a move along

the demand curve, but there is

a shift in demand.

Long-run demand is more elastic (DD).

P 2

D 2

Q 2

D

D

Information: the supply side

 Given substantial economies of

scale, we expect monopoly suppliers

of information products:

 Dominant firm with competitive

fringe

 e.g Microsoft

 Niche market monopolies

Pricing information products

 Strategies for pricing information

products:

– two-part tariff

 an annual charge to cover fixed costs, and a small price per unit related to marginal costs

– versioning

 the deliberate creation of different qualities to facilitate price discrimination

– bundling

 the joint supply of more than one product to reduce the need for price discrimination

Competition vs collaboration

co-operation and competition, in

which a group of suppliers provide

a range of products that partly

complement one another

– e.g Microsoft and Intel

– airline alliances: One World, Star

Understanding the e-economy

 1 The information revolution is

changing our lives

– but few of its activities or market

tactics are unprecedented

 2 The revolution in technology has

not required a corresponding

revolution in economic theory