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Information, Markets and
Society
Kathy E. Gill
30 June 2008
30 June 2008 COM597 - Gill
Overview
What is an Info Economy?
Economics 101
Types of goods
Network effects
Examples and Dis...
30 June 2008 COM597 - Gill
But first ….
This instrument can teach, it can illuminate; yes,
and it can even inspire. But it...
30 June 2008 COM597 - Gill
What Is An Info Economy?
“An economy based on the exchange of
knowledge information and service...
30 June 2008 COM597 - Gill
History of Term, Concept
1963: Tadeo Umesao, Kyoto University,
forecast an information industry...
30 June 2008 COM597 - Gill
Bell
Post-industrial society will be “organized
around knowledge for the purpose of social
cont...
30 June 2008 COM597 - Gill
Digital Expectations
Personal anecdote about trying to read
journal article, Blackwell Publishi...
30 June 2008 COM597 - Gill
Today (almost!)
1997: Bill Gates traced the computer from
mainframe to personal to network. “[W...
30 June 2008 COM597 - Gill
No Standard Nomenclature
Info Economy, Post-Industrial Economy,
“New” Economy?
One definition: ...
30 June 2008 COM597 - Gill
What is Information?
In the context of this class, anything
that can be converted to bits, ie,
...
30 June 2008 COM597 - Gill
What is Information Technology?
Telecommunications, computers, software
Communication: E-mail, ...
30 June 2008 COM597 - Gill
Societal Factors
Demand for IT:
Productivity?
Effect of Growth:
Collapse of space and time
Redu...
30 June 2008 COM597 - Gill
Competing Theories
Technology optimists
A new society without pollution; time for
creative work...
30 June 2008 COM597 - Gill
Summary
Use whatever label you wish … the
makeup of our economy has changed.
Information as a g...
30 June 2008 COM597 - Gill
Economics 101
Supply & Demand
Market Structure
Types of Goods
Network Effects
Examples/Discussi...
30 June 2008 COM597 - Gill
What Is Economics?
Economics is the study of how people (and
institutions) act in a society wit...
30 June 2008 COM597 - Gill
John Kenneth Galbraith
“Faced with the choice between
changing one’s mind or proving that
there...
30 June 2008 COM597 - Gill
Kuhnen & Knutson (2005)
Found that two brain areas known to be
part of emotional processing (th...
30 June 2008 COM597 - Gill
Supply and Demand
Most widely used economic model
Describes how consumers and
producers interac...
30 June 2008 COM597 - Gill
Demand Curve
Shows the quantity of a good (or
service) that consumers are willing to
buy at dif...
30 June 2008 COM597 - Gill
Supply Curve
Shows the quantity of a good (or
service) that businesses are willing to
sell at e...
30 June 2008 COM597 - Gill
Supply-Demand
30 June 2008 COM597 - Gill
Competitive Markets (perfect competition)
No buyer or seller can influence price
Products and s...
30 June 2008 COM597 - Gill
Market Structure
Classic Free (Competitive) Market
Low fixed costs
Marginal cost = price … marg...
30 June 2008 COM597 - Gill
Economics of Information
Costly to produce
Inexpensive to re-produce
Economist-speak:
High fixe...
30 June 2008 COM597 - Gill
Economics of Attention
Info overload: “a wealth of information
creates a poverty of attention”
...
30 June 2008 COM597 - Gill
Types of Goods (1/2)
Non-rival - a good that can be used by more
than one person at the same ti...
30 June 2008 COM597 - Gill
Types of Goods (2/2)
Rival Non-Rival
Excludable
• Most consumer goods
• Private land
• Services...
30 June 2008 COM597 - Gill
Excludability and Information
From the World Bank: Assume
someone produces a valuable theorem,
...
30 June 2008 COM597 - Gill
Types of Excludability (traditional)
Trade Secrets (Coca Cola)
Patents (Amazon One-Click)
Copyr...
30 June 2008 COM597 - Gill
Digital Excludability (transitional?)
DRM
iTunes
Subscriptions
RealNetworks and Napster, The Ec...
30 June 2008 COM597 - Gill
An Experience Good
A good is an “experience” good if a
consumer has to experience it to value
i...
30 June 2008 COM597 - Gill
Complementary Goods
CDs + CD Player
Websites “optimized” for a specific
browser
Bluetooth heads...
30 June 2008 COM597 - Gill
Network effects (1/2)
Static analysis:
One person’s decision to adopt a new piece
of software (...
30 June 2008 COM597 - Gill
Network effects (2/2)
Dynamic analysis:
The value of the software (or technology)
depends upon ...
30 June 2008 COM597 - Gill
Locked In!
Consumers may be locked into a network
because of “cost of exit” (switching)
Contrac...
30 June 2008 COM597 - Gill
Philosophy
Varian thinks it’s a good thing for firms
to figure out how to create a lock as a
wa...
30 June 2008 COM597 - Gill
Tipping
As market share increases for any one
product (system, technology), there
are increasin...
30 June 2008 COM597 - Gill
Examples
AM v FM radio
Beta v VHS
Mac v Windows
QWERTY v DVORAK
BlueRay v HD-DVD
GSM v CDMA
30 June 2008 COM597 - Gill
One More Point …
Time (fixed) + Info Explosion
(overload?) = Increased competition
for “old” me...
30 June 2008 COM597 - Gill
Conclusion (1/2)
Economy is increasingly reliant on
information technologies and
information
Fi...
30 June 2008 COM597 - Gill
Conclusion (2/2)
The products in this sector have
characteristics of a public good -- the
antit...
30 June 2008 COM597 - Gill
For Wednesday
Post to your blog …. Reflection on this
week’s readings AND reflection on your
le...
30 June 2008 COM597 - Gill
Next Assignments
3 July: post your scholarly article and a
reflection on the assigned article
8...
30 June 2008 COM597 - Gill
Lab
Demo “tagging”
Set Up Wordpress Blogs
30 June 2008 COM597 - Gill
Resources (1/3)
The Inkjet Printer, from The Economist. (2002) http:
//emlab.berkeley.edu/users...
30 June 2008 COM597 - Gill
Resources (2/3)
Michael L. Katz and Carl Shapiro. “Systems
Competition and Network Effects,” Jo...
30 June 2008 COM597 - Gill
Resources (3/3)
Timothy F. Bresnahan. “The Economics of the
Microsoft Case.”
http://www.stanfor...
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  • Non-rival - a good that can be used by more than one person at the same time
    Non-excludable – it is not possible for the “owner” to exclude others from consuming it
  • Links to PPTs on externalities
  • Where we ended Monday night!
  • Transcript of "Week130june2008 1215038351122325-8 (1)"

    1. 1. Information, Markets and Society Kathy E. Gill 30 June 2008
    2. 2. 30 June 2008 COM597 - Gill Overview What is an Info Economy? Economics 101 Types of goods Network effects Examples and Discussion
    3. 3. 30 June 2008 COM597 - Gill But first …. This instrument can teach, it can illuminate; yes, and it can even inspire. But it can do so only to the extent that humans are determined to use it to those ends. Otherwise it is merely wires and lights in a box. There is a great and perhaps decisive battle to be fought against ignorance, intolerance and indifference. This weapon of television could be useful. Edward R. Murrow, 1958, RTNDA Convention
    4. 4. 30 June 2008 COM597 - Gill 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.
    5. 5. 30 June 2008 COM597 - Gill History of Term, Concept 1963: Tadeo Umesao, Kyoto University, forecast an information industry 1973: Daniel Bell, Harvard, described a knowledge-based post-industrial economy 1981: Frederick Williams, UT Austin, said the communication revolution had arrived and expounded on the “knowledge worker” The Information Society, A Retrospective View. Dordick and Wang. 1993.
    6. 6. 30 June 2008 COM597 - Gill Bell Post-industrial society will be “organized around knowledge for the purpose of social control and the directing of innovation and change” The transformation is industrial to service Anticipated tension between high-tech, intellectual work and nonprofessionals
    7. 7. 30 June 2008 COM597 - Gill Digital Expectations Personal anecdote about trying to read journal article, Blackwell Publishing (UK)
    8. 8. 30 June 2008 COM597 - Gill Today (almost!) 1997: Bill Gates traced the computer from mainframe to personal to network. “[W]e have the most powerful communications medium of all time… And the information age is changing business in a fundamental way… [as well as] the way we entertain … and … [educate] ourselves.” Information Technology, Corporate Productivity and the New Economy, p 4
    9. 9. 30 June 2008 COM597 - Gill No Standard Nomenclature Info Economy, Post-Industrial Economy, “New” Economy? One definition: the new economy is an integration of free-market economies, globalization and information technology Information Technology, Corporate Productivity and the New Economy, p 9
    10. 10. 30 June 2008 COM597 - Gill 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
    11. 11. 30 June 2008 COM597 - Gill What is Information Technology? Telecommunications, computers, software Communication: E-mail, IM, TheWeb Networks: Extranet, Intranet, Internet, LAN, WAN Software: Expert systems, Enterprise Resource Planning, Query and Reporting, Data Mining Networks: T1, T3, Wireless Protocols: HTTP, FTP, VoIP
    12. 12. 30 June 2008 COM597 - Gill Societal Factors Demand for IT: Productivity? Effect of Growth: Collapse of space and time Reduction of scarcity
    13. 13. 30 June 2008 COM597 - Gill Competing Theories Technology optimists A new society without pollution; time for creative work; participatory democracy; perfect markets… Technology pessimists No new society but an increase the divide between rich and poor; greater control over individuals; erosion of privacy… Technology + economics +society
    14. 14. 30 June 2008 COM597 - Gill 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.
    15. 15. 30 June 2008 COM597 - Gill Economics 101 Supply & Demand Market Structure Types of Goods Network Effects Examples/Discussion
    16. 16. 30 June 2008 COM597 - Gill 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, savings Driving principle: that people optimize the “utility” (satisfaction) of goods and services consumed - that we are rational
    17. 17. 30 June 2008 COM597 - Gill John Kenneth Galbraith “Faced with the choice between changing one’s mind or proving that there is no need to do so, almost everybody gets busy on the proof.”
    18. 18. 30 June 2008 COM597 - Gill Kuhnen & Knutson (2005) Found that two brain areas known to be part of emotional processing (the limbic system) can help predict financial choices
    19. 19. 30 June 2008 COM597 - Gill Supply and Demand Most widely used economic model Describes how consumers and producers interact to determine the price of a good and the quantity that will be produced/sold
    20. 20. 30 June 2008 COM597 - Gill Demand Curve Shows the quantity of a good (or service) that consumers are willing to buy at different prices Assumes “all other things” remain constant (static) Law of Demand: curve slopes “downward” (P on the vertical axis)
    21. 21. 30 June 2008 COM597 - Gill Supply Curve Shows the quantity of a good (or service) that businesses are willing to sell at each price Assumes “all other things” remain constant (static) No “law of supply”
    22. 22. 30 June 2008 COM597 - Gill Supply-Demand
    23. 23. 30 June 2008 COM597 - Gill Competitive Markets (perfect competition) No buyer or seller can influence price Products and services are identical No barriers to entry/exit Everyone (consumer, worker, producer) has access to perfect information on prices and costs
    24. 24. 30 June 2008 COM597 - Gill Market Structure Classic Free (Competitive) Market Low fixed costs Marginal cost = price … marginal cost is the cost of producing one additional unit The “Natural” Monopoly Large fixed costs Small/zero marginal costs
    25. 25. 30 June 2008 COM597 - Gill Economics of Information Costly to produce Inexpensive to re-produce Economist-speak: High fixed costs, low marginal costs
    26. 26. 30 June 2008 COM597 - Gill Economics of Attention Info overload: “a wealth of information creates a poverty of attention” (Herbert Simon)
    27. 27. 30 June 2008 COM597 - Gill 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)
    28. 28. 30 June 2008 COM597 - Gill 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!)
    29. 29. 30 June 2008 COM597 - Gill 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.
    30. 30. 30 June 2008 COM597 - Gill 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.
    31. 31. 30 June 2008 COM597 - Gill Digital Excludability (transitional?) DRM iTunes Subscriptions RealNetworks and Napster, The Economist and the WSJ Lawsuits
    32. 32. 30 June 2008 COM597 - Gill 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”
    33. 33. 30 June 2008 COM597 - Gill Complementary Goods CDs + CD Player Websites “optimized” for a specific browser Bluetooth headset & cellphone Issues: network effects & lock-in
    34. 34. 30 June 2008 COM597 - Gill 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
    35. 35. 30 June 2008 COM597 - Gill 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
    36. 36. 30 June 2008 COM597 - Gill 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”)
    37. 37. 30 June 2008 COM597 - Gill Philosophy Varian thinks it’s a good thing for firms to figure out how to create a lock as a way to improve the bottom line I think that, at best, it’s a short-term strategy and that it is potentially harmful to society
    38. 38. 30 June 2008 COM597 - Gill 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
    39. 39. 30 June 2008 COM597 - Gill Examples AM v FM radio Beta v VHS Mac v Windows QWERTY v DVORAK BlueRay v HD-DVD GSM v CDMA
    40. 40. 30 June 2008 COM597 - Gill One More Point … Time (fixed) + Info Explosion (overload?) = Increased competition for “old” media
    41. 41. 30 June 2008 COM597 - Gill 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
    42. 42. 30 June 2008 COM597 - Gill 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
    43. 43. 30 June 2008 COM597 - Gill For Wednesday Post to your blog …. Reflection on this week’s readings AND reflection on your learning goals for the quarter. Categorize both posts “Reflection”
    44. 44. 30 June 2008 COM597 - Gill Next Assignments 3 July: post your scholarly article and a reflection on the assigned article 8 July: post your book review 10 July: post a reflection on someone else’s scholarly article 10 July: face-to-face meeting here
    45. 45. 30 June 2008 COM597 - Gill Lab Demo “tagging” Set Up Wordpress Blogs
    46. 46. 30 June 2008 COM597 - Gill 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
    47. 47. 30 June 2008 COM597 - Gill 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)
    48. 48. 30 June 2008 COM597 - Gill 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
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