The information economy

Chapter 11 The information economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 11.1 11.2 Use of the internet 0 200 400 600 800 1000 1200 £bn. 1997 1999 2001 2003 Business to business use of the internet 11.3 e-products  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 11.4 Consuming information  experience  overload  switching costs  network externalities Four key features of e-products: 11.5 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 11.6 Information overload … arises when the volume of available information is large …but the cost of processing it is high  screening devices become crucial 11.7 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 11.8 Network externalities Suppose D1 represents the demand curve for a product exhibiting network externalities £ Quantity D1 P1 Q1 With price at P1, demand is limited. If price is reduced to P2, 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). P2 D2 Q2 D D 11.9 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 11.10 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 11.11 Competition vs. collaboration  A strategic alliance is a blend of 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 11.12 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