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